Arizona capital gains tax on real estate is among the lowest of any state that has an income tax: a flat 2.5%, and Arizona lets you subtract 25% of a net long-term gain on property acquired after December 31, 2011, which brings the effective rate to 1.875%. That means a 1031 exchange in Arizona is mostly about the federal tax, which is far larger, and there is no state withholding and no real estate transfer tax to work around at closing.
Reviewed by Jon Hilley, CEO & Founder of 1031 Specialists. Last reviewed September 29, 2026.
| State tax on real estate gains | Flat 2.5% individual income tax |
|---|---|
| Long-term capital gains treatment | Subtract 25% of net long-term capital gain from assets acquired after December 31, 2011 (effective 1.875%) |
| Nonresident withholding at closing | None; nonresidents report Arizona-source gain on Form 140NR |
| Withholding form | None required for real estate sales |
| Transfer or conveyance tax (a 1031 does not defer it) | None. The Arizona Constitution bars new real estate transfer taxes; an Affidavit of Property Value and recording fees apply |
| Clawback on out-of-state replacement property | No Arizona clawback; California's FTB 3840 follows California-source gain into Arizona |
| Conforms to Section 1031 | Yes; Arizona starts from federal adjusted gross income |
| Property tax note | Limited property value can rise no more than 5% a year; residential rentals are assessed at 10% |
Table of contents
- How much is capital gains tax on real estate in Arizona?
- Arizona tax on a $300,000 gain: worked example
- Arizona has no withholding on real estate sales
- Arizona has no real estate transfer tax
- Arizona conformity and clawback rules
- The 2012 acquisition-date rule and your exchange
- Rental tax and property tax on Arizona replacement property
- Moving into or out of Arizona
- Where Arizona exchanges happen
- Federal rules for an Arizona 1031 exchange
- Arizona 1031 mistakes we see
- Start your Arizona 1031 exchange
- Frequently asked questions
- Sources
How much is capital gains tax on real estate in Arizona?
Arizona moved to a single 2.5% rate for all income levels and filing statuses, so a large sale does not push you into a higher state bracket. Gain on real estate is included in Arizona income through federal adjusted gross income, then Arizona offers its own break.
Under A.R.S. 43-1022, you subtract 25% of the net long-term capital gain included in federal adjusted gross income, but only gain from an asset acquired after December 31, 2011. The math is simple: 2.5% on 75% of the gain equals an effective 1.875%. Property bought in 2011 or earlier gets no subtraction and pays the full 2.5%. If you inherited or were given the property, Arizona uses the original owner's acquisition date. If the acquisition date cannot be verified, the subtraction is not allowed, so keep your closing statement.
Arizona has no separate treatment for depreciation. The depreciation portion of your gain is part of the long-term gain, taxed at the same flat rate. Federally it is unrecaptured §1250 gain taxed at up to 25%. There are no city or county income taxes in Arizona.
The federal side: 0%, 15% or 20% on long-term gain (20% above $545,500 single or $613,700 joint taxable income in 2026), plus the 3.8% net investment income tax above $200,000 single or $250,000 joint MAGI.
Arizona tax on a $300,000 gain: worked example
Assumptions: a $300,000 long-term gain on an Arizona rental bought after 2011, $100,000 of it from depreciation, a married couple filing jointly in the top federal bracket.
| Line | Math | Tax |
|---|---|---|
| Federal: unrecaptured §1250 gain | 25% × $100,000 | $25,000 |
| Federal: remaining long-term gain | 20% × $200,000 | $40,000 |
| Federal: net investment income tax | 3.8% × $300,000 | $11,400 |
| Federal subtotal | $76,400 | |
| Arizona: 25% capital gains subtraction | 25% × $300,000 = $75,000 subtracted | |
| Arizona: flat tax on the rest | 2.5% × $225,000 | $5,625 |
| Total deferred by a full 1031 | $76,400 + $5,625 | $82,025 |
If the property was acquired in 2011 or earlier, the Arizona line is 2.5% of the full $300,000, or $7,500, for a total of $83,900. Either way the federal tax is more than 90% of the bill. Use the depreciation recapture calculator for the 25% line and the capital gains vs. 1031 exchange comparison to see what you keep in each case.
Arizona has no withholding on real estate sales
Arizona does not require a buyer or escrow agent to withhold state income tax when a nonresident sells Arizona real estate. The full proceeds can go straight to your qualified intermediary without a state exemption form.
That does not mean nonresidents owe nothing. Real property is taxed where it sits, so a California or Washington resident who sells an Arizona rental for cash reports the Arizona-source gain on Form 140NR and pays the 2.5% rate, less the 25% subtraction if it applies. In a fully deferred exchange there is no Arizona tax due for the sale year. Foreign sellers still face federal FIRPTA withholding; see our guide for foreigners selling US property.
Arizona has no real estate transfer tax
This is a real advantage for Arizona exchanges. Article 9, Section 24 of the Arizona Constitution, approved by voters in 2008, prohibits the state, counties, cities and districts from imposing any new tax, fee or stamp on the sale or transfer of real property. Only charges that existed on December 31, 2007 survive, and Arizona had no general transfer tax then.
What you will pay at closing is small: county recording fees and the Affidavit of Property Value, the form the Department of Revenue requires with most deeds so the assessor can track sale prices. There is no percentage-of-price tax on either your sale or your replacement purchase, which is not the case in California, Washington, Colorado mountain towns or Hawaii.
Because nothing is deferred here, the transfer-tax line in your exchange budget is close to zero, so more of your equity reaches the replacement property.
Arizona conformity and clawback rules
Arizona computes income starting from federal adjusted gross income, so a gain deferred under §1031 on your federal return is also deferred for Arizona. There is no separate Arizona form for the exchange; the federal Form 8824 carries through.
Arizona has no clawback. If you exchange Arizona property into Texas or Florida and later move, Arizona does not require annual reporting of the deferred gain. When the replacement is eventually sold, the state where you live or where that property sits decides the tax.
The clawback investors run into in Arizona is California's. A former Californian who exchanged into Phoenix or Scottsdale must keep filing Form FTB 3840 with California every year until the California-source deferred gain is recognized. When the Arizona property is later sold for cash, California taxes that original gain at its own rates, and Arizona taxes the appreciation after the exchange. Our California page explains the filing.
The 2012 acquisition-date rule and your exchange
The 25% subtraction depends on when you acquired the asset, which raises a practical question after an exchange. Arizona's statute measures from the acquisition of the asset producing the gain, and a replacement property is acquired on the day you close on it. Whether Arizona will look through to the older relinquished property's date when you eventually sell has not been spelled out in the statute text, so ask your CPA before relying on either date.
For owners of property bought before 2012, the difference is modest: 2.5% instead of 1.875%, or $1,875 on every $300,000 of gain. It rarely changes whether to exchange, but it does change the math on whether to cash out a small property rather than roll it forward.
Legislators have proposed extending the subtraction to all assets regardless of acquisition date. As of this review, the statute still limits it to assets acquired after December 31, 2011.
Rental tax and property tax on Arizona replacement property
Two local rules affect the yield on an Arizona replacement property. First, starting January 1, 2025, Arizona eliminated transaction privilege tax on long-term residential rentals of 30 days or more. Landlords no longer collect TPT on apartment and single-family rents, and licenses held only for that activity were cancelled. Short-term rentals are a different category and remain subject to lodging taxes.
Second, property tax is based on limited property value, which under Proposition 117 can grow no more than 5% a year. Rental residential property is class 4 and assessed at 10% of limited value, the same ratio as an owner-occupied home. Commercial property is assessed at a higher ratio, so a strip center pays more property tax per dollar of value than a fourplex.
Moving into or out of Arizona
Moving in from California: Arizona is one of the most common destinations for California investors. Exchanging into Arizona moves future appreciation and rents into a 2.5% state, but the California-source gain stays tracked on FTB 3840. Retirees from the Midwest and Pacific Northwest often exchange into Phoenix and Tucson rentals too; property in their old state remains taxable there.
Moving out: if you move to a no-income-tax state such as Nevada or Texas and later sell Arizona property, Arizona still taxes that Arizona-source gain as a nonresident. Arizona does not follow a replacement property located in another state, so exchanging out of Arizona before a later cash sale leaves Arizona with nothing to tax.
Where Arizona exchanges happen
Maricopa County drives most Arizona exchange volume: build-to-rent communities, industrial space along the Loop 303 and Interstate 10 corridors, and single-tenant retail in fast-growing suburbs such as Buckeye, Queen Creek and Mesa. Tucson offers lower entry prices and steady demand around the university and military base. Flagstaff and Prescott draw exchanges into mountain rentals.
Federal rules for an Arizona 1031 exchange
Name your replacement property in writing within 45 days of closing and complete the purchase within 180 days. A qualified intermediary must hold the funds; you cannot touch them. To defer everything, buy at an equal or higher price and replace your debt or add cash. Our 45-day identification validator checks your list, the 1031 exchange calculator estimates deferral, and the 1031 exchange guides go deeper.
Arizona 1031 mistakes we see
- Cashing out because the state rate is only 2.5%, forgetting that the federal tax on a $300,000 gain is $76,400.
- Losing the closing statement that proves a post-2011 acquisition date, which forfeits the 25% subtraction.
- Former Californians skipping the annual FTB 3840 after exchanging into Arizona.
- Still charging or remitting TPT on long-term residential rents after the January 1, 2025 repeal, or assuming the repeal covers short-term rentals.
- Underwriting commercial replacement property with the 10% residential assessment ratio instead of the higher commercial ratio.
Start your Arizona 1031 exchange
Set up the exchange before your sale closes so we can deliver the assignment and escrow instructions to the title company. Start your exchange or book a 15-minute intro call. If the right Arizona property comes up before your sale, a reverse 1031 exchange lets you buy first.
Frequently asked questions
How can I avoid capital gains tax on real estate in Arizona?
A 1031 exchange defers both the federal tax and Arizona's 2.5% tax when you reinvest all proceeds in like-kind real property through a qualified intermediary. If you sell for cash, the 25% subtraction for assets acquired after 2011 lowers the Arizona rate to an effective 1.875%.
What is the Arizona capital gains tax rate on real estate?
Arizona taxes capital gains at its flat 2.5% income tax rate. You can subtract 25% of net long-term capital gain from assets acquired after December 31, 2011, for an effective rate of 1.875%.
Does Arizona withhold tax when a nonresident sells property?
No. Arizona has no real estate withholding requirement. Nonresidents report Arizona-source gain on Form 140NR, and foreign sellers still face federal FIRPTA withholding.
Does Arizona have a real estate transfer tax?
No. The Arizona Constitution prohibits new taxes on real property transfers, so you pay only recording fees and file an Affidavit of Property Value.
Does the 25% subtraction apply to property I bought before 2012?
No. The subtraction applies only to gain from assets acquired after December 31, 2011. Gain on older property is taxed at the full 2.5%.
If I exchanged California property into Arizona, do I still owe California?
Yes, on the deferred gain from California. You file FTB 3840 with California each year until that gain is recognized, and appreciation after the exchange is taxed by Arizona.
Sources
- Arizona Department of Revenue: Individual income tax highlights
- A.R.S. 43-1022: Subtractions from Arizona gross income
- A.R.S. 43-102: Conformity with the Internal Revenue Code
- Arizona Constitution Article 9, Section 24
- A.R.S. 11-1133: Affidavit of property value
- Arizona Department of Revenue: Residential rental tax changes
- Arizona Department of Revenue: Limited property value
- Arizona Department of Revenue: Property class summary
- California FTB: Form FTB 3840 instructions
- IRS Topic 409: Capital gains and losses
Related: California, Nevada, New Mexico, Utah and all 50 states.
General information for Arizona investors, not tax or legal advice. As a qualified intermediary we do not give tax opinions, so review your own facts with a CPA or attorney.
