Arizona Rental Property Registration Laws for Residential Landlords

The article below was written by our friend Azim Hameed who is an attorney at Sherman Howard.  He  wrote us this broad overview. If you need legal advice regarding real-estate please contact him.  He has helped us and our clients.

In February or March of this year, Arizona property owners should have received a 2013 Property Valuation Notice ("Notice of Valuation") from the County Assessor ("Assessor").  The Notice of Valuation contained a legal notice stating that if your property is used for residential rental purposes but is classified on the Notice of Valuation as being used as your primary residence, you must register the property as a rental property with the Assessor.  The Notice of Valuation also stated that if you fail to register the residential rental property with the Assessor, the city or town in which the residential rental property is located may impose on the owner a civil penalty in the amount of $150.00 per day.  What the Assessor did not mention, due to limited space in the Notice of Valuation, were other potential ramifications of failing to register a residential rental property with the Assessor.

A residential landlord's duty to register with the Assessor is not new.  The requirement has been in existence since 1999.  The required registration form is available at the Assessor's office.  An owner of residential rental property must disclose to the Assessor:

(i) the owner's name, address and telephone number;

(ii) the street address and County tax parcel number of the residential rental property; and

(iii) the year the building was built. 

If the owner of the residential rental property lives outside of Arizona, the owner must designate a statutory agent who lives in Arizona who will accept legal service of process on behalf of the owner.  If you currently own residential rental property that you have previously registered with the Assessor and any of the information on your registration has changed, you must update your information with the Assessor within ten (10) days after the change occurs.

The primary purpose for requiring owners of residential rental property to register with the Assessor is twofold.  First, if a residential rental property deteriorates to such a poor condition that it qualifies as "slum property" there is a public record of the property owner's contact information so the tenant and/or appropriate governmental agency knows who to contact to require that repairs be made.  The second reason is to enable the Assessor to properly classify the property for real property tax purposes.  Primary residences receive some real property tax advantages that residential rental properties do not receive. 

If you currently own a residential rental property you acquired prior to the date of the most recent Notice of Valuation you received from the Assessor and you have not registered the property with the Assessor, the potential ramifications include:

1. City or Town Imposed Civil Penalty and Inspections; Termination of Lease.
2. The city or town in which the residential rental property is located may impose upon you a civil penalty in the amount of $150.00 per day for each day of violation after the date of the most recent Notice of Valuation you received from the Assessor.
3. The city or town can immediately inspect your property to determine the condition of the property.
4. You are prohibited from leasing out the property.  If you have rented out the property, your tenant has the right, after giving you ten (10) days prior written notice, to terminate the lease or rental agreement with you and to vacate the premises if you fail to register the residential rental property with the Assessor within ten (10) days after receipt of the tenant's notice.  If the tenant terminates the rental agreement, you will have to return the security deposit and all prepaid rent to the tenant.
5. County Imposed Reclassification and Civil Penalty. 

If on your Notice of Valuation your residential rental property is classified as your primary residence (Class 3) as opposed to residential rental property (Class 4), you may also be subject to a penalty assessed by the County Treasurer in an amount equal to twice the sum of Additional State Aid (school tax) the State of Arizona paid to school districts with respect to your property in the preceding tax year.  You should receive additional written notice from the Assessor before the Assessor (i) correctly reclassifies your residential rental property as Class 4, and (ii) causes the Treasurer to impose the penalty.

Although a home is considered residential rental property if the house is leased out, the Assessor should still classify a house as a Class 3 primary residence (as opposed to Class 4 rental property) for real property tax purposes if the owner does not lease out the home for more than three (3) months each year or the owner rents the home to a member of the owner's family, such as a child or grandchild, parent, sibling, stepchild, or even the in-laws, who utilizes the home as the relative's primary residence.  Even if you lease a home out to a relative, you must still register the rental property with the Assessor.

If later this year you purchase a home in Arizona for use as a residential rental property and you fail to register the home with the Assessor as a residential rental property, since the Assessor has already mailed out Notices of Valuation for the property (presumably to the prior owner), the city or town in which the home is situated is required to assess against you a civil penalty in the amount of $1,000.00 plus $100.00 for each month after the date of your acquisition of the property during which you have not registered with the Assessor.  The statutory provision imposing this penalty states that a "court shall not suspend any portion of the civil penalty provided by this subsection."  Therefore, this is a mandatory penalty for failing to register a residential rental property with the Assessor at the time you acquire the property. 

How likely is it the city or town in which the home is situated will discover the rental use of your property?  That is difficult to say.  If the city or town provides utility service to the property and there is a discrepancy among the mailing address for the utility bills, the address of the payor of the utility bills, and the address of the owner of record at the County, or if you own more than one house in the city or town, the foregoing may be "red flags" to the city or town.  Or a disgruntled tenant might decide to inform the city or town of the rental.  Also, the Assessor, upon request, is required to provide the city or town a current list of all properties listed as residential rental properties in the Assessor's records to assist the city or town in keeping track of rental property in its jurisdiction. 

In 2012 there was a change in the owner-occupied residence and residential rental property notice requirements.  The Assessor should have included with the Notice of Valuation sent to all owners of property classified as their primary residence (Class 3 property) an affidavit pursuant to which the owner would declare, under penalty of perjury, whether the property is in fact the owner's primary residence or is leased to a qualifying family member.  Perjury is a felony in Arizona.  The Maricopa County Assessor did not send the affidavits.  There has been an ongoing debate among the Arizona Department of Revenue, County officials, and members of the Arizona legislature with respect to the new affidavit requirement and associated penalty of perjury.  There are a number of bills currently pending in the Arizona legislature that may change the affidavit and eliminate the perjury provision and change the amount of civil penalty the County Treasurer can impose on the owner of residential rental property, including Senate Bill 1217 and House Bill 2486.  There is, however, no debate that the owner of residential rental property must register the property with the Assessor.  That has been a longstanding requirement that is receiving renewed attention.

Of course, the primary purpose of the Notice of Valuation was to notify you of the Assessor’s determination of your property’s value and classification as of January 1, 2012, which valuation and classification the County will use to calculate real property taxes for your property in 2013.  The Notice of Valuation set forth the deadline to administratively appeal the Assessor’s determination of your property’s valuation and classification.  Do not miss the deadline if you believe the Assessor overvalued your property or classified the property incorrectly because the deadline is a firm deadline to file an “administrative” appeal with the Assessor.  If you do miss the administrative appeal deadline, you may still be able to appeal the Assessor’s determination of your property’s valuation or classification by filing a “judicial” appeal directly in Superior Court on or before December 15, 2012.  A “judicial” appeal is a lawsuit and lawsuits are usually more expensive to prosecute than an administrative tax appeal. 

Property tax assessment notifications due this month

Beginning Monday February 6, 2012, the Maricopa Assessor's office will begin mailing property tax notifications.

In the past, residences were assumed to be owner occupied and receive a lower subsidized property tax rate but that assumption no longer prevails and owners who live in their homes must sign an affidavit affirming as much to retain a state subsidy that cuts their property-tax bill by up to $600 a year.

If they rent out their house or fail to return the affidavit, they will lose the subsidy and face a higher bill.

The idea is that, by weeding out people who wrongly get the subsidy, the savings will be used to offset a property-tax break for businesses.

No one knows how many homeowners this will affect, though legislative analysts estimated that 25 percent of the rental homes in the state are misclassified and 6.5 percent of homes are second homes. Officials involved in Arizona's real-estate community fear the new requirement could trigger undeserved property-tax hikes as they suspect many property owners will ignore or overlook the requirement to sign the affidavit, which will be attached to the notice of valuation mailed to all property owners each year.

The requirement to declare that a property is owner-occupied, as opposed to a rental, is part of the tax-cut and jobs bill Gov. Jan Brewer signed into law in 2011.

One section of the legislation reduces the rate at which business and agricultural properties are assessed for taxation.

Because of the way Arizona's property taxes work, a cut in one category forces an increase in another - in this case, residential properties - so that there is no net loss in tax dollars collected. But lawmakers, not wanting to see residential taxes rise, increased the amount of the state subsidy, which has been 40 percent of the property-tax bill.

To cover the cost of the business-tax breaks and the increased rebate, lawmakers had to find money to fill the gap. The solution: Crack down on property owners who wrongly claim the rebate.

To do that, the legislation puts the burden on owners to attest that they actually live in the house they own. If they don't, the county will reclassify it as a rental, and the homeowner rebate will no longer be used to reduce the property-tax bill.

Currently, property owners indicate if a home is their residence when they buy a home, and they continue to receive the tax break indefinitely. The new legislation will require them to affirm that every other year, beginning in 2012.

Lawmakers figure they can save $39 million a year by withholding the rebate from people who rent out their properties.

Once the program begins, people will have 60 days to return the affidavit or the assessor will classify the property as a rental.

Lawmakers advise there will be a remedy. People have up to three years after getting a tax bill to provide the proper documentation to restore the homeowner rebate.

Many assessors question whether the policy will yield the $39 million that budget analysts predict.

First, some rentals are eligible for the homeowner rebate. If a house is rented to a direct relative of the owner, it qualifies. Second homes, or vacation homes, also qualify as long as they are not used for more than three months.

Second, assessors say they've already weeded out many properties that shouldn't be getting the state subsidy. In Maricopa County, the Assessor's Office last year removed 4,700 rental properties from the rebate list.

Still, no one has a good handle on how many homeowners are wrongfully benefiting from the long-standing state rebate.

That's all the more reason to use the affidavit, said Kevin McCarthy, executive director of the Arizona Tax Research Association, a business-supported advocacy group.

He also said the process, although almost guaranteed to cause unwarranted angst with some taxpayers, should provide a clearer view of how taxes work.

"I think it would be healthy for people to understand this system is in place and their taxes are being subsidized by the state of Arizona," McCarthy said.

Read more: http://www.azcentral.com/news/election/azelections/articles/2011/03/14/20110314arizona-property-tax-hikes.html#ixzz1lAQPXSEQ

New Line On Arizona Tax Returns for Use Tax

New Line On Arizona Tax Returns for Use Tax

Have you ever bought anything though the internet or though a catalog and not been charged state sales tax on your purchase?  Arizona thinks you may have and has added a line to the 2011 tax returns requiring you to pay use tax on those purchases.  

Use tax is technically the same thing as sales tax except it is charged on out of state purchases where you do not pay state sales tax.  There are two reasons Arizona is pursuing this tax (which has been around since 1955).  First, Arizona is trying to raise revenue and sales taxes are a major source of revenue.  Second, purchases from out-of-state sellers who do not charge a sales tax puts Arizona sellers at a disadvantage.  The use tax puts all retailers on a level playing field.

The Arizona use tax is 6.6% of the total of your out-of-state purchases where you do not pay state sales tax.  The use tax does not apply to purchases that would be exempt from Arizona sales tax such as medical prescriptions, medical supplies, and food for home consumption.

When you send us your information for your 2011 taxes make sure you answer the question on what for your total out-of-state purchases were for purchases where you did not pay state sales tax.  If you have questions on the use tax or whether a purchase needs to be reported, please contact us.

IRS Announces Pension Plan Limitations for 2012

IR-2011-103, Oct. 20, 2011

WASHINGTON — The Internal Revenue Service today announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for Tax Year 2012. In general, many of the pension plan limitations will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged. Highlights include:

• The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000.

• The catch-up contribution limit for those aged 50 and over remains unchanged at $5,500.

• The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.

• The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.

• The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250.

The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2012 from $49,000 to $50,000.

The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $245,000 to $250,000.


The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $11,500.

The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $16,500 to $17,000.

The deductible amount under § 219(b)(5)(A) for an individual making qualified retirement contributions    remains unchanged at $5,000.

It's Time To Start Tax Planning For 2011

Now that extension season is over and personal tax returns are filed for 2010, it is time to start planning for the 2011 tax year.  One good tax planning idea is to claim your Arizona tax credits. 

There are four categories of donations

First is a $400 ($200 for single and heads of household filers) donation to a working poor organization.  Click here for a list of Working Poor organizations and here for Pub 710 working Poor Contributions.

Second is a $400 ($200 for single and heads of household filers) donation to a public school. Click here for Pub 707 - School Tax Credits.

Third is a $1,000 ($500 for single and heads of household filers) donation to a school tuition organization. Click here for a list of School Tuition Organizations and click here for Pub 707 - School Tax Credits

Fourth is a $400 ($200 for single and heads of household filers) donation to the Arizona Military Family Relief Fund. Click here for MFRF Brochure.

Each of these donations works as a credit on your Arizona tax return and a deduction on your Federal tax return.  This means that you could potentially receive up to a 135% return on your donation. 

The only list that we did not provide is the public schools.  That is because you can donate to any public school.  However, for your convenience, you can go to the Osborn District Donation Website where a donation can be made online with your credit card.  This is a school district which we work closely with and support (learn more here). 

Additionally, you can go to Arizona Department of Revenue Tax Credits and learn the who, what, where, when, why and hows.  Disclaimer: you only get the credit if you pay Arizona income taxes.  If you do not have a liability in the current year, the credits (except for MFRF) can be carried forward for a maximum of five years. To be eligible for the working poor credit you must claim itemized deductions on your Arizona return for the same year the credit is claimed.

As always, Price Kong and Co. is here to assist with your year-end tax planning and answer any question you might have.  Please feel free to contact us at 602-776-6300.