Sedona Short Term Rental Taxes: A Complete Guide for Arizona STR Investors

Sedona is one of the most desirable vacation rental markets in the country. Red rock views, world class hiking, year round tourism, and a premium guest base make it a compelling STR investment. On the tax side, Arizona offers some clear advantages, including a flat state income tax rate and the ability to leverage the powerful STR tax loophole with high value properties.

If you are looking at a short term rental investment in Sedona, this guide breaks down every tax that affects your investment, from state income tax and property taxes to the guest facing taxes you will collect and the federal strategies that can save you tens of thousands of dollars.

Arizona’s Flat State Income Tax: 2.5%

Arizona simplified its income tax structure in 2023 to a flat 2.5% rate on all taxable income. This applies to rental income from your Sedona STR regardless of how much you earn.

This is one of the lowest state income tax rates in the country among states that actually levy an income tax. For context:

• Arizona: 2.5%
• Oklahoma: 4.75%
• Alabama: 5%
• California: up to 13.3%
• Tennessee: 0% (no state income tax)

While Arizona is not zero like Tennessee, the 2.5% rate is extremely manageable. On $60,000 in net rental income, your Arizona state income tax would be approximately $1,500. That is a minor cost in the context of a property generating $72,000 or more in gross revenue.

For out of state investors: If you live in another state and own rental property in Arizona, you will need to file an Arizona state tax return and pay Arizona income tax on the income generated by your Sedona property. Most states offer a credit for taxes paid to other states, which prevents double taxation. Consult with a CPA who handles multi state returns to ensure you are filing correctly.

Yavapai County Property Taxes

The majority of Sedona’s STR market falls within Yavapai County. Arizona’s property tax system is based on assessed value, which is a percentage of full cash (market) value.

For residential and rental property, Arizona assesses at 10% of full cash value (this is the “limited property value” basis). The total tax rate in the Sedona area of Yavapai County varies depending on the specific taxing district but generally falls in the range of 8 to 12 dollars per $100 of assessed value.

The effective property tax rate for most Sedona properties works out to approximately 0.6% to 1.0% of market value.

Here is what that looks like in practice:

• $500,000 property: Assessed value of $50,000. At an effective rate of 0.8%, property tax is approximately $4,000 per year
• $700,000 property: Approximately $5,600 per year
• $1,000,000 property: Approximately $8,000 per year

These rates are moderate. Not the lowest in the country, but far from the highest. For a premium market like Sedona, property taxes are a manageable carrying cost.

Coconino County note: A portion of Sedona falls in Coconino County, which may have slightly different millage rates. If you are looking at properties on the Coconino side, verify the specific tax rate for that parcel.

Transaction Privilege Tax (Collected from Guests)

Arizona does not have a traditional sales tax. Instead, it uses a Transaction Privilege Tax (TPT), which functions similarly but is technically levied on the privilege of doing business in Arizona. For short term rental operators, TPT applies to your rental revenue.

Here is how the TPT layers work for Sedona STRs:

• Arizona state TPT on transient lodging: 5.5%
• Yavapai County TPT: 0.5% to 1.0%
• City of Sedona TPT: Approximately 3% to 4%

Total TPT collected from guests: approximately 9% to 10.5% depending on exact location.

This tax is collected from guests as part of their booking total and remitted to the Arizona Department of Revenue. It is not a cost to you as the property owner, but it does increase the total price guests pay when booking your property.

How TPT is collected and remitted:

• Through a property manager: Most Sedona property managers handle TPT collection and remittance as part of their service
• Through Airbnb/Vrbo: These platforms collect and remit TPT in Arizona. Verify that your specific jurisdiction is covered by the platform’s tax agreements
• Self collected: If you self manage and the platform does not handle it, you must register with the Arizona Department of Revenue, collect TPT, and file TPT returns (typically monthly)

TPT registration: Regardless of how you collect, you need a Transaction Privilege Tax license from the Arizona Department of Revenue. This is a straightforward online registration process.

The Short Term Rental Tax Loophole: Why Sedona Is Ideal

The STR tax loophole is arguably even more powerful in Sedona than in lower priced markets because higher property values mean larger depreciation deductions.

Here is the framework:

Qualify as non passive: Your Sedona STR’s average guest stay must be 7 days or fewer (it will be), and you must materially participate in the rental activity. Material participation can include activities like setting pricing, communicating with your property manager, reviewing financials, making improvement decisions, and coordinating maintenance.

Accelerate depreciation through cost segregation: A cost segregation study reclassifies components of your property into shorter depreciation categories. Instead of depreciating the entire building over 27.5 years, a cost seg study identifies components (appliances, flooring, outdoor features, landscaping, lighting, HVAC components, cabinetry) that can be depreciated over 5, 7, or 15 years. With bonus depreciation, much of this can be deducted in year one.

Use the resulting paper loss to offset active income: When your accelerated depreciation plus operating expenses exceed your rental income (on paper), the resulting loss can offset your W2, business income, or other active income sources.

Cost Segregation: A $600,000 Sedona Property Example

Property: $600,000 Sedona home Land allocation: Approximately 20% ($120,000 to land, $480,000 to building and improvements)

Standard depreciation: $480,000 over 27.5 years = $17,455 per year

With cost segregation: On a $600,000 Sedona property, a cost seg study typically identifies $140,000 to $200,000 in accelerable depreciation. Sedona properties often score well on cost seg studies because of:

• Outdoor living features (patios, fire pits, outdoor kitchens, landscape lighting)
• Pool and spa equipment
• Custom tile, stonework, and specialty finishes common in Southwest design
• Upgraded appliances and fixtures
• Desert landscaping features (irrigation systems, hardscaping, retaining walls)

Year One Tax Savings

At the 37% federal tax bracket:

• $140,000 in accelerated depreciation x 37% = $51,800 in year one tax savings
• $200,000 in accelerated depreciation x 37% = $74,000 in year one tax savings

Even after the 2.5% Arizona state income tax on your rental income, the net tax benefit is enormous. For many investors, the year one tax savings from cost segregation alone exceed the entire down payment on the property.

Why Higher Priced Markets Amplify the Loophole

The STR tax loophole scales with property value. A $600,000 Sedona property generates roughly 50% more in accelerated depreciation than a $400,000 cabin in another market. For high income investors in the 37% bracket, that translates to proportionally larger tax savings. This is one of the reasons premium markets like Sedona attract sophisticated investors who are thinking about total return (cash flow plus tax savings plus appreciation), not just cash flow alone.

Federal Income Tax Deductions

Beyond the STR tax loophole, Sedona STR owners can deduct a comprehensive list of operating expenses on their federal return:

• Mortgage interest (often the largest single deduction)
• Property taxes
• Insurance (including any wildfire coverage)
• Property management fees
• Cleaning and turnover costs
• Utilities (electricity, water, gas, internet)
• Pool and spa maintenance
• Landscaping
• Repairs and maintenance
• Furnishings and supplies
• Platform booking fees
• Travel to the property for management purposes
• Professional services (CPA, attorney, cost seg study)
• Depreciation (standard or accelerated)

When all deductions are totaled, many Sedona STR owners show a significant paper loss while their property generates positive or near breakeven cash flow. That paper loss, when used to offset active income through the STR tax loophole, is where the real financial return is generated.

Self Employment Tax

STR income from a Sedona property is generally not subject to self employment tax (15.3%) when reported as rental income on Schedule E. This applies to the vast majority of STR owners who provide standard rental amenities (furnished home, linens, kitchen, pool access) but do not provide “substantial services” like daily cleaning, concierge, or meals.

If you are unsure whether your specific situation triggers SE tax, consult with an STR savvy CPA.

Arizona Specific Tax Considerations

Arizona does not impose a franchise tax or business and occupation tax on rental activity. This is a positive compared to states like Washington (B&O tax) or some states with franchise taxes on entities holding real estate.

LLC structure: Many Sedona STR investors hold property in an LLC for liability protection. Arizona’s LLC annual report fee is $0 (no annual report required). There is a $50 biennial publication requirement for new LLCs. This makes Arizona one of the cheapest states to maintain an LLC.

1031 exchanges: If you eventually sell your Sedona STR, you can use a 1031 exchange to defer capital gains taxes by reinvesting in another investment property. Arizona conforms to federal 1031 exchange rules.

Tax Filing Checklist for Sedona STR Owners

1. Register for a TPT license with the Arizona Department of Revenue before collecting any rental income
2. Get a cost segregation study in your first year of ownership to maximize accelerated depreciation
3. Track material participation hours to qualify for the STR tax loophole. Keep a detailed log
4. File Arizona Form 140NR (for non residents) or Form 140 (for residents) reporting your Sedona rental income
5. Report rental income and expenses on your federal return (Schedule E or Schedule C)
6. Work with a CPA who specializes in STR tax strategy. The difference between a general CPA and an STR specialist can easily be five figures in annual tax savings

Ready to Invest in Sedona?

Arizona’s 2.5% flat income tax, moderate property taxes, and the powerful STR tax loophole make Sedona one of the most tax efficient premium STR markets in the country. When you combine the tax advantages with Sedona’s strong demand, year round tourism, and long term appreciation, the investment case is compelling.

Contact The Short Term Shop at 800-898-1498 or visit theshorttermshop.com to talk with an agent who specializes in Sedona STR investments. For STR specific lending, connect with The Mortgage Shop.

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Disclaimer

The Short Term Shop is a real estate brokerage, not a certified public accounting firm, tax advisory firm, or financial planning service. Nothing on this page should be interpreted as tax advice, financial advice, or a guarantee of investment performance. Always consult your CPA, tax attorney, and financial advisor before making any investment or tax decisions.

All income and revenue figures referenced in this article are sourced from third party data providers including AirDNA and PriceLabs.co. These figures represent market averages and percentile ranges based on historical performance data and do not guarantee future results. Actual short term rental income varies significantly based on property quality, location, management quality, pricing strategy, seasonality, and market conditions. Your results may differ.