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Tax Guide on Short-Term Rental Properties in Arizona

Key Takeaways

  • Real estate investors who rent out their residential property or apartment unit for more than 14 days annually must report their earnings to the Internal Revenue Service (IRS).
  • While there is no state tax on rentals, there is a sales tax known as the Arizona transaction privilege tax (TPT), which applies to vendors offering any service, including real estate investors with short-term rentals (STR).
  • In Arizona, you must have a transaction privilege tax license. However, you are not required to have a business license if you rent out spaces for fewer than 31 days.

Published on Apr 3, 2024 | Updated on Apr 18, 2024

An outline of the state of Arizona with VRBO and Airbnb location pins on it to show short-term rentals in the state.

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Arizona’s diverse landscape, spanning expansive grassland to the captivating desert, is a magnet for tourists from across the globe, making it a prime location for investing in vacation homes and short-term rentals.

We’re diving into the steps you can take to file your taxes and claim all eligible deductions as a property manager renting spaces on Airbnb and VRBO. 

What’s considered a short-term rental?

Short-term rentals are generally any rental of 30 days or less. Whether you advertise your vacation rental through social media, Airbnb, or VRBO, when you rent your place for less than 30 days, you need to file a tax return even if you didn’t earn a rental income. Renting out your place for more than 30 days is considered a residential rental and has its own set of rules. 

When should I report the rental income for my short-term rental?

If you’re renting out your place for holiday events, like winter, spring, or summer break, it falls under the category of vacation rental properties. Usually, people advertise these short-term rental properties on online lodging marketplaces like Airbnb. Airbnb will report rental owner activity during tax season, but you must still file taxes. 

The good news is that rental property owners earning an active income may write off various expenses. 

Tax day across the United States is on April 15, 2024. If you file for an extension with the IRS and it’s approved, you don’t need to file an extension with the state of Arizona. 

Do I always need to report rental income on my short-term rental?

There is a 14-day rule that exempts you from filing taxes if you rent out your property for less than 14 days annually. Airbnb, VRBO, and other similar online platforms must report all earnings even with the 14-day rule in place.

Your rental income from the STR is subject to Arizona transaction privilege tax and may be subject to other transient lodging taxes. All businesses that sell services or earn a profit from lodging will need a transaction privilege tax license.

How do I report rental income for my short-term rentals?

Keeping a log of all your rental activity and including receipts will make your reporting virtually effortless when tax day arrives.

Follow these steps to help you get started: 

Step 1: Gather the proper forms

Prepare all the necessary forms and rental information. If you hired a property management company to oversee your vacation rental, the property managers should provide you with receipts and details you’ll need to complete your taxes.

To learn more about how to file a Schedule E, explore our step-by-step guide.

You can use multiple Schedule E 1040 forms to manage multiple vacation rental properties. If you’re earning your rental property income from an online marketplace like Airbnb, you can opt to use a W-9 form to collect your information before filing your 1040 form with the IRS. 

Step 2: Determine if the structure of your business is active or passive

Are you actively ensuring the dwelling unit is habitable by providing routine maintenance, pest control, cleaning service, and repairs? If you answer yes to any of these services, you are doing the job of a property manager and earning an active income. This classification is important to help you capitalize on tax deductions when filing. 

Usually, the IRS considers profits earned from a rental property passive income even when property owners schedule maintenance and repairs, due to the seasonal nature of these services. 

Step 3: Reporting rental income with a Schedule E (Form 1040)

If you’re ever in doubt about how to report your earnings and losses to the IRS, consider consulting a tax professional. They can guide you through all of the nuances of what counts as a valid deductible expense. That way, you are optimizing your return and gaining larger deductions.  

As a recap, a tax professional may recommend using a W-9 form to collect information from Airbnb. This will help you avoid having 28% of your rental income withheld. You can collect the full amount of your earnings from Airbnb and submit a 1040 to the IRS. 

To sum up, a 1040 form is used to tell the government how much money you earned from your STR.

Key tax deductions for short-term rentals

You may be able to write off the following business expenses on your STR:

  • Property taxes
  • Mortgage interest rate
  • Insurance premiums
  • Depreciation
  • Furnishing
  • New appliances
  • Maintenance and repairs
  • Cleaning services
  • Travel expenses and applicable business expenses

Remember the importance of keeping an organized record of all your transactions, income, and services, which can help your accountant maximize all eligible deductions.

You can use this template to help track your rental expenses

FAQ: Rental property tax deductions in Arizona

Each city sets its tax rate. In Phoenix, the residential rental property sales tax is 2.3%. There is no state tax in Arizona for rental properties. However, short-term rental owners must register for a license.

Earning from any rental that you rent for more than 14 days is considered taxable income. The good news is there are business expenses that may be deductible, including: 

  • Mortgage interest
  • Property taxes
  • Travel and transportation expenses
  • Maintenance and repairs
  • Professional fees
  • Insurance premiums

You may have to register for a transaction privilege tax license, but you are not obligated to have a property management business license if you manage a property for fewer than 31 days.

Our final thoughts

Whether investing in real estate as a vacation rental or considering more long-term endeavors, such as a 12-month or period rental, discover all the essential rental documents you will need to manage a property in Arizona. 

If you need help determining which path is right for you, learn all of the advantages of managing both short-term and long-term rentals.

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