Does Arizona tax capital gains on real estate?
Yes. Arizona capital gains tax on real estate is part of the regular state income tax, which has been a single 2.5% rate on Arizona taxable income since the flat tax took effect; the 2025 Form 140 tells filers to multiply taxable income by 2.5%, and we found no change for 2026. Arizona has no separate capital gains tax and no special rate for real estate.
What makes Arizona different from most income-tax states is a subtraction for long-term gains. Under A.R.S. 43-1022, you subtract 25% of the net long-term capital gain included in your federal adjusted gross income, as long as the gain comes from an asset acquired after December 31, 2011. On a qualifying gain, that turns the 2.5% rate into an effective 1.875%.
Arizona capital gains tax rate in 2026
The Arizona capital gains tax rate is the same 2.5% that applies to wages, rent and interest, because the state treats gains as ordinary income and then gives the long-term subtraction. There are no brackets to climb. A $50,000 gain and a $5 million gain are both taxed at 2.5% before the subtraction.
| Type of gain | Arizona treatment | Effective Arizona rate |
|---|---|---|
| Short-term gain (held one year or less) | Taxed as ordinary income, no subtraction | 2.5% |
| Long-term gain, asset acquired after 12/31/2011 with a verifiable date | 25% subtracted, rest taxed at 2.5% | About 1.875% |
| Long-term gain, asset acquired before 2012 or date cannot be verified | No subtraction | 2.5% |
| Gifted or inherited property | Uses the giver’s or decedent’s acquisition date | Depends on that date |
| Section 1245 recapture (personal property, cost segregation) | Ordinary income on the federal return, so not a capital gain | 2.5% |
How Arizona tax stacks on top of federal tax
Your Arizona tax is added to the federal tax on the same sale; one does not replace the other. Arizona starts from federal adjusted gross income, so the gain you report on your federal return flows straight onto Form 140, and then the state adjustments apply.
Federal long-term rates for 2026 are 0%, 15% and 20%, set by taxable income under Revenue Procedure 2025-32. A married couple filing jointly pays 0% on taxable income up to $98,900, 15% up to $613,700 and 20% above that. For single filers the cutoffs are $49,450 and $545,500. Gain from past depreciation on a building (unrecaptured section 1250 gain) is taxed at up to 25%, and the 3.8% net investment income tax applies above $250,000 of modified AGI on a joint return or $200,000 for single filers.
Because Arizona’s rate is low, the federal side drives most of the bill. On a large apartment sale, Arizona usually adds roughly 2% of the gain while federal tax can reach about 24% to 29% of it.
Who qualifies for the 25% long-term gain subtraction
You qualify if the gain is long-term on your federal return, is included in federal AGI and comes from an asset you can show you acquired after December 31, 2011. ADOR’s Form 140 instructions say that if the acquisition date can’t be determined, the asset is treated as bought before 2012 and gets no subtraction.
- Keep your settlement statement from the purchase. It is the simplest proof of the acquisition date.
- Property received as a gift or inheritance takes the giver’s or decedent’s acquisition date, so a building your parents bought in 2005 does not qualify even if you inherited it in 2024.
- Gain you claim under another Arizona subtraction, such as the qualified small business subtraction, can’t be counted again here.
- The subtraction applies to net long-term gain, so capital losses in the same year reduce it.
Depreciation recapture in Arizona
Arizona taxes depreciation recapture at the same flat 2.5% as everything else, so there is no higher state rate on the part of your gain that came from depreciation. The open question is whether that part also gets the 25% subtraction.
Neither A.R.S. 43-1022 nor the 2025 Form 140 instructions say whether unrecaptured section 1250 gain counts toward the subtraction. The statute refers only to net long-term capital gain included in federal AGI, and we could not find ADOR guidance that settles it. Confirm the treatment of the depreciation part of your gain with a CPA before you rely on the lower rate. Section 1245 recapture from cost segregation is ordinary income on the federal return, so it is not a long-term capital gain at all.
Arizona also keeps its own depreciation figures. The state adds back federal depreciation and subtracts depreciation computed under Arizona rules (for assets placed in service after 2016, figured as if federal bonus depreciation were 100%), and your Arizona basis is adjusted when you sell. If you used cost segregation or bonus depreciation, your Arizona gain can differ from your federal gain, so ask your preparer to carry the Arizona basis forward.
Nonresident sellers: no withholding at closing
Arizona does not withhold state income tax at closing when a nonresident sells Arizona real estate. That sets it apart from states such as California, which hold back a share of the price in escrow.
Instead, 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 on sales by nonresidents. The seller still owes Arizona tax on the gain and files a nonresident return. Plan for the tax in April even though nothing is taken out at the title company.
Residency decides what Arizona can reach. A resident pays Arizona tax on gains wherever the property sits, and a nonresident pays Arizona tax only on Arizona-source gains, such as a building in Scottsdale or Yuma. If you moved away before the sale, you report the Arizona building on the nonresident return and the rest of your income in your new home state.
Worked example: selling a $2 million apartment building in Arizona
Here is the tax on a $2,000,000 sale of a Phoenix apartment building by a married couple already in the top federal bracket. They bought it in 2015 for $1,200,000, took $350,000 of straight-line depreciation and pay $120,000 in selling costs. Their adjusted basis is $850,000, the amount realized is $1,880,000 and the gain is $1,030,000. We assume Arizona and federal depreciation match.
| Tax | Base | Rate | Amount |
|---|---|---|---|
| Federal, unrecaptured section 1250 gain | $350,000 | Up to 25% | $87,500 |
| Federal, remaining long-term gain | $680,000 | 20% | $136,000 |
| Net investment income tax | $1,030,000 | 3.8% | $39,140 |
| Federal total | $262,640 | ||
| Arizona, if the 25% subtraction covers the whole gain | $772,500 ($1,030,000 less 25%) | 2.5% | $19,313 |
| Arizona, if only the non-depreciation gain qualifies | $860,000 ($1,030,000 less 25% of $680,000) | 2.5% | $21,500 |
| Combined federal and Arizona | $281,953 to $284,140 |
What the example shows
Arizona tax on this sale is about $19,000 to $22,000, under 8% of the combined bill. Without the subtraction (if the building had been bought in 2010, for instance), Arizona would take $25,750. The federal tax of $262,640 is where planning pays off, and that is where a 1031 exchange or an installment sale makes the biggest difference. You can test your own numbers in the capital gains tax calculator and the depreciation recapture calculator.
Three Arizona sellers, three different state bills
The same gain can carry different Arizona tax depending on when and how you bought, because the subtraction turns on the acquisition date and the holding period. The federal tax on these sales would also differ, but the table isolates the Arizona line on a $1,030,000 gain.
| Seller | Why | Arizona tax on $1,030,000 |
|---|---|---|
| Bought in 2015, held more than a year | Long-term, acquired after 2011, subtraction applies | $19,313 to $21,500 |
| Bought in 2010, held 16 years | Long-term, but acquired before 2012 | $25,750 |
| Inherited in 2020 from a parent who bought in 2008 | Takes the parent’s 2008 acquisition date | $25,750 |
What to gather before you sell
The paperwork that sets your Arizona tax is mostly about dates and basis, and it is easier to collect before the sale closes than in March. Your preparer will ask for these.
- The closing statement from your purchase, which proves an acquisition date after 2011.
- Your federal depreciation schedule and, separately, the Arizona depreciation schedule if bonus depreciation or cost segregation was used.
- A record of capital improvements, which raise basis on both returns.
- For an inherited or gifted building, the original owner’s purchase date and the date-of-death or gift value.
- If you are a nonresident, your expected Arizona-source gain, since nothing is withheld in escrow to cover it.
- A decision on a 1031 exchange before you sign the sale contract, because the intermediary has to be in place before closing.
How a 1031 exchange changes the Arizona bill
A 1031 exchange defers Arizona tax along with federal tax, because Arizona starts from federal AGI and a deferred gain never reaches it. In the example above, a full exchange into a $2,000,000 or larger property, with all net proceeds reinvested, would put off the $262,640 federal bill and the Arizona tax of up to $21,500.
Cash you keep (boot) is taxable in Arizona at 2.5%, less the 25% subtraction if it qualifies. Taking $100,000 out of the exchange would cost $2,500 in Arizona tax, or $1,875 with the subtraction, plus federal tax. Arizona has no clawback filing for exchanges into other states, which we cover on our 1031 exchange in Arizona page.
Selling an Arizona apartment building to Skyline
Skyline buys apartment buildings with five or more units in Arizona, from Phoenix and Mesa to Tucson and Flagstaff. We buy directly, close on your timeline, and can work inside 1031 deadlines. If you are weighing the tax on a sale, we can set a closing date that fits your exchange or your tax year.
Selling? Spread the tax with seller-carry terms
If a large tax bill is what is keeping you from selling, an installment sale may help. When you carry part of the price as a note, the gain is generally reported as you receive payments instead of all in the year of sale. Some parts of the gain, such as certain depreciation recapture, can still be due up front, so run the numbers with your CPA first.
Skyline Capital Investments buys apartment buildings with five or more units and can offer seller-carry terms, or a delayed closing that fits your 1031 timeline. Send the address and unit count and we typically respond within 48 hours. How seller financing works · How an installment sale is taxed · Seller financing calculator.
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