Taxes on Selling a House in Arizona: What to Expect
Arizona ranks among the 10 states with the lowest overall tax burdens. One reason for this is the Grand Canyon State’s recent change to a flat income tax rate of only 2.5%. This positive ranking also holds true regarding taxes on selling a house in Arizona.
This post is designed to simplify and clarify the financial aspects of selling your home in Arizona, helping you better understand what to expect. We’ll also share a few tips from an expert Arizona real estate agent.
“The two biggest taxes you need to be aware of are your property taxes, and the tax that you may owe on the profit (capital gains) depending on whether it’s an investment property or a primary residence,” says Matthew Potter, a top Arizona real estate agent who works with 78% more single-family homes than the average Phoenix agent.
Let’s start by taking a look at capital gains taxes.
Editor’s note: This post is for educational purposes, and is not intended to be construed as financial or tax advice. HomeLight encourages you to reach out to an advisor.
Capital gains tax
If you profit from the sale of a home in Arizona, then you may owe some capital gains tax unless you qualify for an exclusion, which we’ll address in the table below.
Capital gains are the profits made when you sell an appreciable asset, such as your home. For example, if you buy a home for $300,000 and sell it for $500,000, you have a capital gain of $200,000.
Capital gains are taxed by both the state and federal governments, but Arizona does not distinguish between short-term and long-term capital gains. It taxes all capital gains as ordinary income.
However, on the federal level, gains can be considered either short-term or long-term.
Short-term capital gains are when you sell an asset within a year of purchasing it. Those gains are included in your ordinary income and taxed according to your tax bracket.
Long-term capital gains are any profits made from the sale of an asset after at least a full year of ownership. For a home sale, those gains are taxed according to the following table.
2024 capital gains tax brackets (long-term capital gains)
The table below shows the long-term capital gains rates for tax year 2024. Single filers can qualify for the 0% long-term capital gains rate with a taxable income of $47,025 or less. Married couples filing jointly can qualify with an income of $94,050 or less.
Tax rate
Single filers
Married filing jointly
Head of household
20%
$518,901 or more
$583,751 or more
$551,351 or more
15%
$47,026 to $518,900
$94,051 to $583,750
$63,001 to $551,350
0%
$0 to $47,025
$0 to $94,050
$0 to $63,000
Source: IRS.gov (Capital gains table)
“The only thing that I’ve ever encountered to lower or remove these taxes is if you’re doing what’s known as a 1031 exchange, where you’re going from one investment property to another,” Potter explains.
“I have a client that’s doing this right now,” Potter says. “She’s selling an investment property, and there’s going to be a pretty substantial tax bill there. However, due to the fact that she can show that a lot of money has been put into the property for improvements — between maintenance items and upgrades — she’s going to be able to reduce some of that tax liability.”
However, he adds that most non-investor homeowners will take advantage of the capital gains tax exclusion.
What is the capital gains tax exclusion?
Both the IRS and Arizona provide a capital gains tax break for home sellers who meet certain conditions. This is a statutory exclusion on profits from the sale of your family home. The maximum amount of capital gain that can be excluded is $250,000 for single filers or $500,000 for a married couple filing jointly.
To qualify for the full exclusion amount, according to IRS Publication 523, the following criteria must be met:
The home being sold is your primary residence.
You’ve owned the home for at least two years in the five-year period before selling it.
You’ve lived in the home for at least two years within the five-year period before selling it. The years you’ve lived in it don’t need to be consecutive. Certain exceptions to this rule are made for those who are disabled or those in the military, Foreign Service, intelligence community, or Peace Corps.
You didn’t acquire the home through a like-kind exchange (also known as a section 1031 exchange) within the past five years. This is basically when you swap one investment property for another.
You haven’t claimed the exclusion on another home in the past two years.
You aren’t subject to expatriate tax (a government fee paid by those who renounce their citizenship or take up residency in another country).
