Phoenix allows short-term rentals in casitas under state mandate

Arizona cities are changing their short-term rental (STR) regulations to comply with a new state law that includes provisions on backyard guest houses, known as casitas or accessory dwelling units (ADUs).

House Bill 2720, signed by Governor Katie Hobbs earlier this year, specifies how far local governments can go in regulating ADUs. The law sets standards for local ADU requirements, including aspects such as the number of ADUs allowed on a lot and rules for design and setbacks. The new state law goes into effect January 1, 2025.

The measure, which applies to cities with populations over 75,000, bars local governments from banning the use of ADUs for STRs. Cities that had stricter rules than allowed by the state law are being forced to change their laws to comply. 

Phoenix changed its law on November 20. When the city approved its ADU law in 2023, it banned the use of casitas as STRs amid concerns about affordable housing. Now, that use is legal. Phoenix leaders aren’t happy about the mandated change.

“Our version of ADUs and what we viewed as a prohibition on short-term rentals were crafted with insight from our community members that was vetted over a substantial time period. We have procedures that worked for the residents of Phoenix and I encourage the Legislature again, rather than moving forward with these preemptive notions, how about we do this in a more collaborative manner,” said Councilwoman Kesha Hodge Washington.

Scottsdale has also reluctantly modified its regulations to comply with the state legislation, and Chandler is in the process of changing its ADU law.

Arizona has a history of restricting the ways in which cities can regulate STRs. However, the state did give cities more power in this area with a 2022 law that allows cities to govern STRs by requiring permits or licenses and community notification of operations, mandating liability insurance coverage, and fining owners or management companies when guests violate ordinances.

Since then, several local governments have placed stricter regulations on STRs including Chandler, Coconino County, Flagstaff, Phoenix, and Scottsdale.

Arizona STRs are subject to state and local lodging taxes. In Arizona, vendors are taxed for the privilege of doing business in the state, with taxes levied on short-term rental businesses according to their gross receipts.

Arizona requires STR owners to have a state transaction privilege tax (TPT) license. Hosts must collect state TPT and county excise tax from their guests and remit it to tax authorities. STR operators may pass the taxes on to their guests. The state requires all STR marketplaces, such as Airbnb and Vrbo, to collect and remit state and local taxes on STRs.

Avalara MyLodgeTax can help short-term rental operators in Arizona comply with state and local tax registration, collection, and filing requirements. For more on Arizona lodging taxes, see our state vacation rental tax guide. If you have tax questions related to vacation rental properties, drop us a line and we’ll get back to you with answers.