Arizona taxes capital gains at 2.5%. Combined with federal taxes, your effective rate on a home sale could reach 21.3%.
AZ State Rate
2.5%
Flat tax rate
Federal Rate
15%
Most common long-term bracket
Combined Effective
21.3%
On $150K taxable gain (example)
After the $250K/$500K exclusion, here's what a typical seller might owe.
If Arizona is where your primary residence is located and you've lived there at least 2 of the last 5 years, you can exclude up to $250K (single) or $500K (married filing jointly) of your capital gain from both federal and state taxes.
Investment and rental properties in Arizona don't qualify for the exclusion. You'll owe 2.5% state tax plus federal tax on the full gain, plus 25% depreciation recapture on any depreciation claimed.
In Arizona, homes sold in January sell for 11% more than those sold in August (-7%). Timing your sale right can offset a significant portion of your tax bill.
Capital gains tax rates on home sales in Arizona and nearby states.
| State | Rate | Tax on $150K Gain | Notes |
|---|---|---|---|
Nevada0% | 0% | $0 | No state income tax |
ArizonaYou | 2.5% | $3,750 | Flat tax rate |
| 4.4% | $6,600 | Flat tax rate | |
| 4.65% | $6,975 | Flat tax rate | |
| 5.9% | $8,850 | Top marginal rate; 40% deduction available |
Selling in Nevada instead of Arizona would save $3,750 in state tax on a $150K gain.
Arizona levies a flat 2.5% income tax rate on all income, including capital gains. This is one of the lowest state income tax rates in the nation and was reduced from a graduated system in recent years, making Arizona increasingly attractive for real estate investors and retirees selling appreciated property.
At 2.5%, Arizona's capital gains tax is significantly lower than neighboring states like California (13.3%) and New Mexico (5.9%), though higher than Nevada (0%). On a $150,000 taxable gain, you would owe just $3,750 in state tax compared to nearly $20,000 in California. This tax differential has been a key driver of Arizona's real estate boom as buyers relocate from higher-tax states.
Arizona does not distinguish between short-term and long-term capital gains at the state level. Both are taxed at the flat 2.5% rate. However, the federal distinction still applies, so holding property for more than one year before selling remains advantageous for the federal portion of your tax bill.
The Phoenix metro area, Tucson, and Scottsdale have all seen significant appreciation in recent years, which means many sellers face gains that exceed the federal exclusion. Arizona's low rate provides some cushion, but sellers with gains above $250K (single) or $500K (married) should plan for both federal and state tax obligations.
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