Does Arizona tax capital gains on a home sale? Yes, but most primary-home sellers owe little or nothing. Arizona starts from your federal adjusted gross income, so gain covered by the federal $250,000 single / $500,000 joint exclusion isn't taxed by Arizona either. Any taxable gain is taxed at Arizona's flat individual rate, 2.5% for tax year 2025.
Is there an Arizona break on top of that? Yes. A.R.S. 43-1022 lets you subtract 25% of net long-term capital gain on assets acquired after Dec. 31, 2011. And no, Arizona did not eliminate the tax on home sales this year. SB 1633, which would have, stalled in the House.
Data note: Federal rules come from IRS Topics 701 and 409 and Publication 523. Arizona rules come from A.R.S. 43-1022, the Arizona Department of Revenue and the Arizona Senate fact sheet for SB 1633. This is general information, not tax advice.
Step 1: The Federal Home Sale Exclusion
The Basics (IRS Topic 701)
- Exclude up to $250,000 of gain, or $500,000 on a joint return
- Ownership test: you owned the home at least two of the five years before the sale
- Use test: you lived in it as your main home at least two of those five years
- Frequency limit: generally no exclusion if you used it on another home in the two years before the sale
- A reduced exclusion may be available for certain moves; IRS Publication 523 has the worksheets
Gain Above the Exclusion
- Taxed as capital gain: federal long-term rates of 0%, 15% or 20% for assets held more than a year (IRS Topic 409)
- Some higher earners also owe the net investment income tax (NIIT)
- Selling costs and qualifying improvements reduce your gain, so keep records
Step 2: How Arizona Taxes What's Left
The Flat Rate
- The Arizona Department of Revenue lists a flat 2.5% individual income tax rate for tax year 2025
- Capital gain is taxed as part of income; Arizona has no separate capital gains rate
The 25% Long-Term Subtraction
- A.R.S. 43-1022: subtract 25% of net long-term capital gain included in federal AGI
- Applies to assets acquired after Dec. 31, 2011
- Practical effect: at a 2.5% rate, long-term gain on a qualifying asset is taxed at roughly 1.875% in Arizona (2.5% x 75%)
A Quick Illustration
A married couple sells a Scottsdale home they've lived in for 10 years with a $650,000 gain:
- Federal exclusion: $500,000, leaving $150,000 taxable
- Arizona 25% subtraction: $37,500, leaving $112,500
- Arizona tax at 2.5%: about $2,813 on the gain
Illustration only; actual results depend on the full return.
What Happened to SB 1633?
The question behind the search "why is Arizona dropping capital gains tax on home sales" is this bill:
- What it would have done: a full Arizona subtraction for net capital gain on a home that was the taxpayer's primary residence for at least five of the preceding years, starting tax year 2027
- Cost estimate: JLBC projected a General Fund decrease of $18.4 million a year beginning FY 2028, noting the estimate was speculative
- Where it went: passed the Senate 16-12 on Feb. 26, 2026, then did not advance in House Ways and Means
- Status: not law; today's rules above still apply
Second Homes, Rentals and Investment Property
- No home sale exclusion unless the property meets the main-home tests
- Rentals: depreciation you took (or could have taken) is generally recaptured; see IRS Publication 523 and your CPA
- Arizona's 25% long-term subtraction still applies to qualifying assets acquired after 2011
Planning Moves Before You List
- Check your dates: two years of ownership and use, and when you last used the exclusion
- Gather your basis: purchase closing statement plus improvement receipts
- Estimate your gain early, with your CPA, before choosing a list price and move date
- Budget the full picture with our cost to sell a house in Arizona guide
“The tax conversation should happen before the listing conversation, not after the offer. For long-time Scottsdale owners with big gains, a few months either way or a stack of remodel receipts can change the math, and I'd rather you know that while you still have choices. I always bring the numbers and send you to a CPA for the final word.”
— Elizabeth Vijan, Tackett Team, eXp Realty
FAQ: Arizona Capital Gains on a Home Sale
Does Arizona tax capital gains on the sale of a home?
Yes, at the flat 2.5% rate, after the federal exclusion and a 25% long-term subtraction.
Do you pay capital gains on the sale of a primary residence?
Often not: $250,000 single / $500,000 joint is excluded if you meet the two-of-five-years tests.
Did Arizona eliminate capital gains tax on home sales?
No. SB 1633 passed the Senate but stalled in the House.
Is there capital gains tax on a second home in Arizona?
Yes. The exclusion covers only a qualifying main home.
Planning a Sale in Scottsdale or Phoenix?
I'll prepare a net sheet showing your estimated proceeds, so you and your CPA can plan the timing with real numbers.
Elizabeth Vijan | Tackett Team, eXp Realty
Scottsdale & Phoenix Real Estate
Talk to Elizabeth About Selling · Call or text 602-885-7752
Sources: IRS Topic 701: Sale of your home · IRS Topic 409: Capital gains and losses · IRS Publication 523: Selling your home · A.R.S. 43-1022: Subtractions from Arizona gross income · Arizona DOR: Individual income tax highlights · Arizona Senate: SB 1633 fact sheet · Arizona Legislature: SB 1633 bill status
Disclaimer: General information, not tax or legal advice. Tax rules and rates change; consult a CPA or tax attorney about your situation. Information deemed reliable but not guaranteed. Equal Housing Opportunity.
Tackett Team, eXp Realty · Get in touch