Rental Tax Ban Coming in 2025: What You Need To Know

Are You Ready for January 1, 2025? What You Need To Know About the Rental Tax Ban

In 2023, Arizona passed a law that abolished rental tax - opens in a new tab. The law is not set to take place until January 1, 2025, to allow cities and towns to adjust to the loss of income. Because this is such a hotly contested issue and because it relies on landlord passing this savings on to residents, both tenant advocates and news media will be watching landlords closely to ensure compliance with the law and that residents actually receive the reduction in their rent.

Watch the below OnDemand webinar where AMA Attorney members discuss the elimination of sales tax on rent.

Legal Update Webinar  -  opens in a new tab     Member Guidance

Here are the things you need to know:

1. This doesn't take effect until January 1, 2025. However, you must plan now and stop all rental tax on that date.
2. On January 1, 2025, landlords are prohibited from charging the rental tax. In other words, landlords should actually decrease the amount they are charging residents at that time.
3. The law creates a basis for a tenant to sue over the tax amount if its still being collected by the landlord. This was a contested issue and there will be people searching for landlords that do not pass along these savings. Not only will you get sued (potentially in a class action), you will end up in the news. Further, as you can see from the story below, you may get sued by the attorney general as well.
4. Its not just the tax on rent that is decreased. All previous charges that had taxes on them, should also be decreased. For example, if late fees were $5.00 plus $.09 in tax, that part that is tax, should be removed in 2025. Late fees would only be $5.00.
5. For all new residential leases starting on January 1, 2025 or later, the lease should not include rental taxes.
6. Landlords should start to notify tenants of the reduction in the amount owed, and advertise it publicly. This should be promoted as a good thing for residents. Under ARS 33-1314 a landlord is required to serve a formal, legal 30 day notice to change the tax rate. When you are increasing the tax, you absolutely have to do so. However, since you are abolishing the tax pursuant to state law, and because the tenant is saving money, it's not clear whether a formal 30 day notice is required, or you can simply send notices via community communications and via email. Its unclear what damage a tenant would have, if no formal notice is sent.
7. This ban does not apply to commercial rentals (meaning cities can charge a rental tax).
8. This ban does not apply to "health care facilities, long-term care facilities or hotel, motel or other transient lodging business." ADOH has already come out and said this only applies to long term residential dwellings. Therefore, short term rentals will still have to pay the applicable tax. You must know this if you operate a hybrid model, and must tax accordingly.

This elimination of rental tax will cost the cities a lot of money and there was a lot of press about how landlords are not going to change and were just going to keep the extra funds. It is critically important that this not happen. Landlords must be compliant starting on January 1, 2025. All residents should see a decrease in their rent and related charges, when the tax is stopped. If you do not separately line item this tax on monthly rental statements, you may need to consult your tax accountant to determine what impact, if any, this may have on the billings to the tenants.