Short-Term Rental Taxes in Arizona: Scottsdale, Sedona, and the Desert Market
2.5% flat state income tax (one of lowest in U.S.) | Conforms to federal bonus depreciation | Strong markets in Scottsdale, Sedona, Phoenix, Flagstaff | Transaction privilege tax 5.5% + local rates
Arizona passed Proposition 208 (2020) and SB 1828 (2021), ultimately landing on a flat 2.5% income tax rate for all taxpayers — one of the lowest flat income tax rates in the nation. Combined with Arizona's full conformity to federal bonus depreciation and strong, diverse STR markets (desert luxury, spiritual retreat, college town, and mountain), Arizona is one of the best states in the country for STR investing from a tax perspective.
Arizona's 2.5% Flat Income Tax
Arizona's 2.5% flat income tax applies to all net taxable income including rental income. For a high-income investor, this is dramatically lower than California (up to 13.3%) or even states like Oregon (up to 9.9%) or New York (up to 10.9%). The combined federal + state marginal rate for a top-bracket Arizona investor is approximately 39.5% — vs. 50.3% in California.
Arizona conforms to federal depreciation including 100% bonus depreciation. Cost segregation deductions reduce both federal and Arizona taxable income proportionally. A $150,000 bonus depreciation deduction saves 37% federally ($55,500) and 2.5% at the Arizona level ($3,750) — total of $59,250 in first-year combined tax savings.
Arizona Transaction Privilege Tax on STRs
Arizona's version of a sales tax is the Transaction Privilege Tax (TPT). For STR rentals, the state TPT rate is 5.5%. Additional city TPT rates apply in most markets. STR operators must register for TPT with the Arizona Department of Revenue and collect and remit the tax.
| Market | State TPT | City TPT | Total Rate |
|---|---|---|---|
| Scottsdale | 5.5% | 1.75% | 7.25% |
| Sedona (City of Sedona) | 5.5% | 3% | 8.5% |
| Phoenix | 5.5% | 2.3% | 7.8% |
| Tempe | 5.5% | 1.8% | 7.3% |
| Flagstaff | 5.5% | 2.281% | 7.78% |
| Tucson | 5.5% | 2% | 7.5% |
| Cave Creek | 5.5% | 3% | 8.5% |
Top Arizona STR Markets
Scottsdale: Premier desert luxury STR market. High-end homes with pools, outdoor kitchens, and resort-style amenities command premium nightly rates. High personal property ratios for cost seg — pool, outdoor entertainment areas, and premium interior furnishings are standard.
Sedona: Spiritual retreat and red rock tourism destination. Very high ADR relative to property values, making Sedona STRs among the best yield-per-dollar markets in the West. Sedona adopted a strict STR ordinance; ensure properties are in compliant zones.
Flagstaff: Mountain market offering respite from Phoenix summer heat. Northern Arizona University drives year-round demand. Cooler climate, pine forest setting — different amenity profile from desert properties.
Maximize Your Arizona STR Tax Strategy
Arizona's 2.5% income tax + full federal bonus depreciation = exceptional STR returns. Get your free estimate for your Scottsdale or Sedona property.
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