Should I Rent Out My House or Sell It? (Scottsdale, Paradise Valley and Arcadia)

The 3-year window: how renting can cost you the tax break

Short answer: You keep the home sale exclusion only if you owned and lived in the home for at least 2 of the 5 years before the sale. Rent it out too long and you lose it.

• The exclusion. You may exclude up to $250,000 of gain from income. A married couple filing jointly may exclude up to $500,000. (IRS Publication 523, 2025)
• The test. You must have owned the home for at least 24 months and lived in it for at least 24 months (730 days) during the 5 years before the sale. (IRS Publication 523, 2025)
• What that means for a rental. Say you lived there for 2 years or more right before you moved out. Then you have up to about 3 years after moving out to sell and still pass the test. After that, the 5-year lookback no longer holds 2 years of living there.
• Rent after you move out. Time after your last day living in the home, within the 5-year period, does not count as "nonqualified use." So renting it after you move out does not shrink the exclusion by itself. (IRS Publication 523, 2025)
• Rent before you move in. Time after 2008 when the home was not your main home, such as renting it first and moving in later, generally is nonqualified use. That part of the gain may not be excluded. (IRS Publication 523, 2025)

Depreciation: the part you can't exclude

Short answer: Once you rent the home, the depreciation you took (or could have taken) is taxed when you sell, even if the rest of the gain is excluded.

• You can't exclude it. The part of your gain equal to depreciation allowed or allowable after May 6, 1997 can't be excluded. (IRS Publication 523, 2025)
• "Allowable" matters. You reduce your basis by depreciation you deducted or could have deducted. Skipping the deduction does not avoid the tax. (IRS Publication 527, 2025)
• The rate. This gain is called unrecaptured section 1250 gain. It is taxed at a maximum rate of 25%. (IRS Topic No. 409, 2025 tax year)
• How it is figured. When you convert a home to a rental, the basis for depreciation is the lower of your adjusted basis or the fair market value on the day you convert. Residential rental property is depreciated over 27.5 years. (IRS Publication 527, 2025)

Arizona taxes and registration for a rental

Short answer: Arizona cities no longer charge sales tax on long-term home rentals as of January 1, 2025. You still must register the rental with the County Assessor.

• No city rental tax on long-term rentals. For periods on and after January 1, 2025, residential rental owners should no longer collect or pay city transaction privilege tax (TPT). The change came from A.R.S. § 42-6004(H), amended by Laws 2023, Chapter 204. (Arizona Department of Revenue, Residential Rental Guidelines, read October 19, 2026)
• Short stays still pay tax. Stays of fewer than 30 days must still collect and pay TPT under the transient lodging or hotel class. (Arizona Department of Revenue, read October 19, 2026)
• County registration is required. Property used solely as a residential rental must be registered with the Maricopa County Assessor under A.R.S. § 33-1902. You register online through your parcel's "Register Rental" tab. (Maricopa County Assessor FAQ, read October 19, 2026)
• Keep it current. The owner must update the information within 10 days of a change. The Assessor may charge up to $10 per registration or change. The statute also sets civil penalties for owners who don't register. (A.R.S. § 33-1902, read October 19, 2026)
• Owners who live out of state. You must name a statutory agent who lives in Arizona. (Maricopa County Assessor FAQ, read October 19, 2026)

Short-term rental rules by city

Short answer: A rental of fewer than 30 days needs a city or town permit in Scottsdale, Paradise Valley and Phoenix. Scottsdale and Paradise Valley say a rental of 30 days or more does not.

City of Scottsdale (City of Scottsdale, page last updated July 31, 2026)

• Each short-term rental needs an annual city license. The fee is $250 per property.
• You need a valid Arizona TPT license first.
• Within 30 days of getting the license, you must notify nearby homes: next door, across the street and on the diagonal. In a multi-family building, it is the units on the same floor.
• The rental must carry liability insurance of at least $500,000, directly or through the booking platform.
• Owners who rent for 30 days or longer do not need this license.

Town of Paradise Valley (Town of Paradise Valley, read October 19, 2026)

• Before you offer a short-term rental, you must register it with the Town, get a Town permit and hold a state TPT license.
• The Town says it issues a permit within 7 days when the information is complete and correct.
• If you rent for more than 30 consecutive days, no Town rental permit is needed.
• The Town no longer charges TPT on those long-term rentals as of January 1, 2025.

City of Phoenix, including Arcadia (City of Phoenix, read October 19, 2026)

• Arcadia sits mostly inside the City of Phoenix. Check which city your address is in.
• Every short-term rental needs a Phoenix permit. The rule took effect November 6, 2023.
• The initial and renewal fee is $250 per permit and is non-refundable.
• You must send a Notice of Intent by certified mail to nearby homes and to registered HOAs and neighborhood associations within 600 feet.

Your HOA may have its own rental rules. The Town of Paradise Valley notes that state law does not stop an HOA from limiting short-term rentals.

Property tax: what changes when you rent

Short answer: A rented home moves from Legal Class 3 (primary residence) to Legal Class 4.2 (rental). The tax ratio stays the same, but you lose the State Aid Credit.

• New class. Registered rentals are classified as Legal Class 4.2, rental or leased residential. A rental lived in by a qualified family member as their primary residence can stay Class 3. (Maricopa County Assessor FAQ, read October 19, 2026)
• What it costs you. The Assessor says the tax ratio and assessment stay the same in Class 3 or Class 4.2. But a Class 4.2 home is not eligible for the State Aid Credit on the tax bill, which may raise your bill. (Maricopa County Assessor FAQ, read October 19, 2026)
• Who counts as a qualified family member. Your child or grandchild, stepchild, parent or grandparent, stepparent, child-in-law, or sibling. (Maricopa County Assessor FAQ, read October 19, 2026)

Local rents: what the public data shows

Short answer: The Census Bureau's median gross rent was $2,013 a month in Scottsdale and $1,582 a month in Phoenix (American Community Survey, 2020 to 2024 estimates, via Census QuickFacts, read October 19, 2026).

These figures cover all renter homes, apartments included, and average 5 years of survey data. A single-family home in Paradise Valley, Arcadia or Scottsdale may rent for a very different amount. Use them as background, not as your rent estimate. For your home, compare current leases on similar homes nearby.

A framework: the questions that decide it

Short answer: Rent only if the numbers work every month and you can afford the bad months. Sell if the tax window, your equity or your cash needs point that way.

Work through these in order:

1. Is your 3-year window running? Count from the day you moved out. If you plan to sell within about 3 years, renting may keep the exclusion. Past that, you may owe tax on gain that would have been tax free.
2. How much equity is tied up? Equity in a rental is money you can't use for your next home, a business or savings without selling or borrowing.
3. Does the rent cover the full monthly cost? Add your mortgage payment, property tax, insurance and HOA dues (PITI plus HOA). Then add repairs and upkeep. Compare that total to a realistic rent for your home.
4. Can you cover empty months? A home between tenants still costs the full monthly amount. Plan for at least some months with no rent.
5. Do you have reserves? A roof, an air conditioner or a water heater can fail in the same year as a vacancy. Know where that money comes from.
6. Will you manage it or pay someone? Self-management takes time and local presence. Professional management is a cost; get written quotes before you decide.
7. Will rules limit your plan? Check your HOA rules and, for short stays, the city or town permit rules above.
8. What does a sale cost now? Compare today's net proceeds with your likely proceeds later, after depreciation tax. See what selling actually costs.

If the rent covers the full monthly cost with room to spare, you have reserves, and you plan to sell inside the 3-year window, renting can make sense. If the rent falls short, the window is closing, or you need the equity, selling is often the simpler path. A CPA can run the tax side for your exact dates and numbers.