The Groves Report

Local Taxes:
More Woes for Landlords

BBy William H. Barchilon
Certified Public Accountant, Licensed Real Estate Broker

The road to riches through real estate may have found some potholes over the recent past. Declines in real estate have caused many new real estate investors to think they have gotten stuck in another dot.com crash. But unlike buying a dot.com, rental real estate has ongoing responsibilities. Besides worrying about collecting rents and fixing toilets, our local governments may also be watching you as a source of much needed funds. Two taxes are of highest concern – property taxes and sales taxes.

With regard to property taxes: When real estate is purchased as a rental, or a former principle residence becomes a rental, you will need to inform the County Recorders office about the change in the property’s usage. Unless you rent the property to a family member, the new rental status will mean an increase in property taxes, as some credits/deductions on a principle residence are not available for rentals. And don’t think that no one is watching. Sherriff Joe Arpiao has established a task force (filled with ASU accounting students) who now look at property tax records to spot rental properties. If the property address and the mailing address for tax purposes are different, you may become a target for investigating the property’s status. And if caught, a substantial bill for back taxes, interest and penalties can sour your investment.

Sales taxes on rentals are another overlooked matter. As Arizona cities are always looking for revenue, this is the newest area of concern, and it is the area with the most complexity. There are no state/county sales taxes, but each city collects at its own rate and uses its own rules. Some will tax the landlord if there is only one rental in their city. Others (such as Phoenix) require more than one residential property, but will institute the tax on one rental if the owner also has commercial property anywhere for rent in Arizona or if the landlord has more than three residential properties in the state (even if only one is in Phoenix). This area is quite complex, requiring investigation into each city’s tax code and another overall code known as the Model City Code. Those investors who have licensed property management companies do not have to worry too much, as all property managers are required to collect and remit sales taxes on all properties they manage.

Rental real estate can be a wonderful long-term investment, with cash flow and possible tax benefits. But it also has its pitfalls; ones that can be quite costly if they catch you unaware. Be sure to contact your attorney, CPA or real estate broker for specific advice on your situation. A little knowledge and awareness can help you turn that rental into one more brick on the road to riches.