Owning a rental in Tucson can be a great long-term investment, but the tax side has plenty of moving parts. Depreciation, passive loss limits, repairs versus improvements, Arizona’s rental taxes: it adds up fast. Chris J. Reynolds, CPA, helps landlords and investors across Tucson and Southern Arizona keep their books clean, claim what they’re entitled to, and plan ahead for the day they sell. And he’s a landlord himself, so he knows rental ownership from the owner’s side of the lease.
A CPA Who Owns Rentals in Tucson Too
Chris owns rental properties here in Tucson. He’s dealt with maintenance calls, turnovers and year-end paperwork firsthand, so you won’t get textbook answers that ignore how rentals work in real life.
Reporting Your Rental Income on Schedule E
Most individual landlords report rental income and expenses on Schedule E of their Form 1040. That includes rent, mortgage interest, property taxes, insurance, repairs, management fees and depreciation, and each item needs records to support it. We prepare Schedule E, and for owners with LLCs, partnerships or multiple properties, we make sure the right return is being filed.
Depreciation and Cost Segregation
Depreciation lets you deduct a rental building’s cost over time. Residential rental buildings are generally depreciated over 27.5 years and commercial buildings over 39 years. Land isn’t depreciable, so the purchase price has to be split between land and building.
A cost segregation study looks at your property to find components, such as certain fixtures and land improvements, that can be depreciated faster than the building itself. It can move deductions earlier, but it isn’t right for every property, and depreciation taken now affects your tax when you sell. We help you decide whether the numbers justify a study and coordinate with the engineer if they do.
Repairs vs. Improvements
A repair that keeps your property in working order is generally deductible right away. An improvement that betters, restores or adapts the property generally has to be depreciated. A patched roof leak is a repair, while a full roof replacement is typically an improvement. The IRS also offers safe harbors that can help. For example, a de minimis safe harbor generally lets you deduct items costing up to $2,500 per invoice or item if you follow the rules. We help you classify expenses and use the safe harbors available to you.
Passive Loss Rules and Real Estate Professional Status
Rental activities are generally treated as passive, which means rental losses can usually only offset passive income. If you actively participate in your rentals, you may be able to deduct up to $25,000 of rental loss against other income, but that allowance phases out between $100,000 and $150,000 of modified adjusted gross income. Disallowed losses aren’t lost forever. They carry forward.
Real estate professional status can change the picture, but the bar is high. You generally must spend more than half of your working time in real property businesses and more than 750 hours a year, and you must materially participate in your rentals. We look at your hours and records and tell you honestly whether you qualify.
Short-Term Rentals
Tucson’s visitors and winter residents make short-term rentals popular, and the tax rules differ from long-term rentals. Whether your short-term rental counts as a “rental activity” for passive loss purposes depends on the average length of guest stays and the services you provide, and that affects how losses are treated. Arizona also taxes short-term lodging, which we cover below.
Bookkeeping for Landlords
Good books make tax time easier and help you see which properties actually pay. We help landlords set up clean systems, including:
- Separate bank accounts and cards for your rentals
- Tracking income and expenses by property
- Organizing receipts, closing documents and depreciation schedules
- Ongoing bookkeeping support if you’d rather not do it yourself
Selling a Rental: Depreciation Recapture
When you sell a rental, the depreciation you’ve claimed (or were allowed to claim) generally reduces your basis, which increases your taxable gain. For individuals, the portion of gain from depreciation on real property is generally taxed at a maximum 25% federal rate, which is higher than the typical long-term capital gains rate. Arizona taxes the gain too. Planning ahead can help, and a 1031 exchange may let you defer the tax by rolling into another property. Our 1031 exchange page has more if you’re thinking of selling.
Arizona TPT and Rental Tax
Arizona’s transaction privilege tax (TPT) rules for rentals changed recently, so older advice may be out of date.
- Long-term residential rentals: Starting January 1, 2025, residential rentals of 30 days or more are no longer subject to city TPT, and Arizona has no state or county TPT on them. Owners generally no longer need to collect and file residential rental TPT for periods beginning in 2025. Taxes for earlier periods still need to be resolved.
- Commercial rentals: Leasing real property for commercial purposes is still subject to county and city TPT, depending on where the property is located.
- Short-term rentals: Stays of less than 30 days are treated as transient lodging and are subject to TPT. You generally need a TPT license, and you may need a city business license too.
Rules and rates vary by location, so we help you work out what applies to your property.
Rental Property Tax FAQ
Do I still need to charge TPT on my Tucson long-term residential rental?
Not for periods beginning January 1, 2025 or later. Commercial rentals and stays under 30 days are different, and those are still taxable.
Can I deduct rental losses against my regular income?
Sometimes. It depends on your income, how involved you are in the rental, and whether you qualify as a real estate professional. Otherwise, losses are usually carried forward.
What if I never claimed depreciation?
It can still matter. Depreciation is generally treated as “allowed” whether or not you claimed it, so it can affect your gain when you sell. We can look at options.
Let’s Get Your Rentals in Order
If you own rental property in Tucson or elsewhere in Southern Arizona, we’d love to help you keep more of what you earn. This page is general information, not tax advice.