1031 Exchange in Arizona

By Skyline Capital Investments · Updated October 26, 2026 · 6 min read

Does Arizona recognize 1031 exchanges?

Yes. Arizona recognizes 1031 exchanges in full. Arizona income tax starts from federal adjusted gross income, so a gain you defer on your federal return never enters your Arizona return, and the Arizona tax is deferred along with it. There is no separate Arizona exchange form.

The federal rules control everything about the exchange itself. You must trade real property held for investment or business use for other like-kind real property, keep the proceeds with a qualified intermediary, identify replacements in writing within 45 days and close within 180 days or by your return due date, if earlier. Our 1031 exchange rules guide covers each requirement with its source.

The federal 1031 rules every Arizona exchange must meet

Because Arizona simply follows the federal result, an exchange that fails a federal rule fails for Arizona too. These are the requirements in brief, all from IRC 1031 and Treas. Reg. 1.1031(k)-1.

Arizona 1031 exchange rules compared with federal rules

Arizona adds almost nothing to the federal rules, which is why exchanges here are simpler than in states like California. The table sets the two side by side.

Withholding at closing and how an exchange affects it

Arizona does not withhold state income tax at closing on real estate sales, for residents or nonresidents, so an exchange has no withholding to waive. In states such as California, an exchanging seller has to file a form to stop escrow from holding back part of the price. In Arizona there is nothing to file at the title company.

What Arizona does require is reporting. Under A.R.S. 43-312, the licensed escrow agent files an information return with the Arizona Department of Revenue by March 31 of the following year on the Arizona real estate sales it closed, and ADOR uses those returns to track tax owed by nonresident sellers. If you are a nonresident and your exchange is complete, you have no Arizona tax to pay on it. If you received boot, you report that gain on an Arizona nonresident return.

Is there an Arizona 1031 clawback?

No. We found no Arizona rule that tracks gain deferred on Arizona property after you exchange into another state. California, Massachusetts, Montana and Oregon have clawback or tracking rules that follow the deferred gain out of state; Arizona is not among them.

That makes the order of your moves matter. If you exchange an Arizona building for one in Texas and later sell the Texas building as a Texas resident, the deferred Arizona gain is not taxed by Arizona under any rule we found. If you stay an Arizona resident, Arizona taxes the gain when you finally sell, because residents are taxed on all their income. Ask a CPA to confirm the result for your own move before you plan around it.

Does Arizona regulate qualified intermediaries?

No. Arizona has no statute that licenses, bonds or regulates 1031 qualified intermediaries. Nine states do: California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia and Washington. Their laws typically require fidelity bonds, errors and omissions coverage or segregated accounts.

Without a state law, the protection in an Arizona exchange comes from the contract and the intermediary you pick. The federal rules still bar your agent, attorney, broker or anyone who acted for you in the past two years from serving as your intermediary.

• Ask whether exchange funds sit in a separate, segregated account in your name or under your taxpayer ID.
• Ask for proof of a fidelity bond and errors and omissions insurance, and the coverage amounts.
• Require dual signatures, yours and the intermediary’s, for any withdrawal.
• Check how long the firm has been in business and who owns it.

Common 1031 exchange paths for Arizona owners

Arizona owners use the same exchange structures as anyone else, and the state treats each one as the federal return does. These are the paths we see most.

• Arizona to Arizona: a Phoenix fourplex into a Mesa or Chandler apartment building. Simple, with no state filings beyond your normal return.
• Arizona to out of state: an Arizona building into property in Texas, Florida or another state. Arizona has no clawback filing to track it.
• Out of state into Arizona: owners selling in California often buy in Arizona. California’s tracking rules still follow that California gain.
• Into a Delaware statutory trust for owners who want to stop managing property, covered in our 1031 exchange DST guide.
• A reverse exchange, buying the Arizona replacement first through an exchange accommodation titleholder.
• Nonresident sellers: no withholding at closing, but an Arizona nonresident return for any boot.

Worked example: exchanging a $3 million Tucson apartment building

A married couple in the top federal bracket sells a Tucson apartment building for $3,000,000. They bought it in 2014 for $1,900,000 and have taken $500,000 of depreciation, so their adjusted basis is $1,400,000. Selling costs are $150,000. Their gain is $3,000,000 minus $150,000 minus $1,400,000, or $1,450,000.

They exchange into a $3,200,000 building with all net proceeds reinvested and the old loan fully replaced, so the whole gain is deferred. The deferred gain carries into the new building through a lower basis, and it comes due if they later sell without another exchange.

What happens if you take cash out

Any cash you keep is boot, and Arizona taxes it at 2.5%. Say the couple in the example takes $150,000 out of the exchange and reinvests the rest in a larger property with replaced debt. Arizona tax on that $150,000 is $3,750, or $2,813 if the 25% subtraction applies to it. Federal tax on the boot comes on top, at up to 25% for the depreciation portion, plus the 3.8% surtax.

Whether the subtraction reaches the depreciation part of a gain is not addressed in A.R.S. 43-1022 or the Form 140 instructions, which is why the example shows a range. Your CPA can tell you which figure to plan around. You can run your own figures in the 1031 exchange calculator.

Debt replacement and partial exchanges

Paying off a loan at closing counts as boot unless you take on equal or greater debt on the replacement or add cash to make up the difference. If the Tucson building carried a $1,200,000 mortgage and the couple’s new loan is only $1,000,000, the $200,000 drop is treated like cash received, on both the federal and the Arizona return, unless they bring $200,000 of new money to the closing.

A partial exchange still works. You defer the gain on what you reinvest and pay tax only on the boot. For an Arizona owner who wants some cash out, the state cost of that choice is small, about 2.5 cents or less per dollar, so the federal tax on the boot is what to weigh.

Timing tips for an Arizona exchange

The calendar is the hardest part of most exchanges, and a few Arizona habits help. Arizona escrow and title companies handle most closings, so line up your intermediary before the escrow instructions are signed and have the purchase contract assigned to the intermediary.

• Start looking at replacements before your sale closes; 45 days goes quickly in a tight Phoenix or Tucson market.
• For a fall sale, plan to extend your federal return so the 180-day period is not cut short by the April due date.
• If you are buying a building with an older limited property value, its tax bill will not reset at your purchase, which can help your replacement’s NOI.
• Keep the settlement statement from your Arizona replacement, since its acquisition date matters for the 25% subtraction when you sell it later.

Selling your Arizona building inside an exchange

Skyline buys apartment buildings with five or more units in Arizona and works with sellers who are exchanging. We buy directly, close on your timeline, and can work inside 1031 deadlines. We can sign the intermediary assignment, set a closing date that gives you time to identify a replacement, and close quickly when you are ready. For the bigger picture, see our complete 1031 exchange guide.