If you own property in Arizona, then in February or March of this year, you 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 charge you with 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:
- the owner's name, address and telephone number;
- the street address and County tax parcel number of the residential rental property; and
- the year the building was built.
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," the registration provides a public record of the property owner's contact information so the tenant or the appropriate governmental agency knows the party 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.
Some Tips and Reminders about Registering
- Out-of-State Owners Must Take Additional Steps: If you own residential rental property in Arizona but live outside the state, you must designate a statutory agent who lives in Arizona and who will accept legal service of process on your behalf. 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 10 days after the change occurs.
Failing to Register A Current Residence May Be Costly: 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 the following:
City or Town Imposed Civil Penalty and Inspections; Termination of Lease.
- The city or town in which the residential rental property is located may charge you with 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.
- 2.The city or town may immediately inspect your property to determine the condition of the property.
- 3.You are prohibited from leasing out the property. If you have rented the property, your tenant has the right, after giving you 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 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.
- County Imposed Reclassification and Civil Penalty.
- City or Town Imposed Civil Penalty and Inspections; Termination of Lease.
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 takes any action to (i) correctly reclassify your residential rental property as Class 4, and (ii) cause the Treasurer to impose the penalty.
Note, although your house is considered residential rental property if you have leased it to a tenant, the Assessor should still classify the house as a Class 3 primary residence (as opposed to Class 4 rental property) for real property tax purposes if (i) you lease out the home for less than three months each year, or (ii) you rent the home to a member of your family, such as a child or grandchild, parent, sibling, stepchild or even the in-laws, who will utilize the home as the relative's primary residence. However, even if you lease a house to a relative, you must still register the rental property with the Assessor or you could be subject to the city or town imposed penalties and inspections.
- Register When You Buy: 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, then, because 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.
Assessing The Risk
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. It is always possible that 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, a change occurred in the owner-occupied residence and residential rental property notice requirements. The Assessor should have included with the Notice of Valuation sent to every owner of property classified as the owner's 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. Debate continues among the Arizona Department of Revenue, Maricopa County officials, and members of the Arizona legislature with respect to the new affidavit requirement and associated penalty of perjury. Coming out of that debate, a number of bills are currently pending in the Arizona legislature, including Senate Bill 1217 and House Bill 2486, that may change the affidavit, eliminate the perjury provision and change the amount of civil penalty the County Treasurer may impose on the owner of residential rental property. 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 sets 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 your 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. However, your appeal may come at a higher price, since a "judicial" appeal is a lawsuit, and lawsuits are usually more expensive to prosecute than an administrative tax appeal.