Arizona taxes capital gains as ordinary income — up to 2.5% — stacked on top of federal tax, so selling appreciated real estate can cost roughly ~26.3% of the gain. A 1031 exchange into a Delaware Statutory Trust lets Arizona investors defer that combined bill and trade active landlording for passive institutional real estate.
~26.3%Est. combined tax if you sell
2.5%Top state rate on gains
5.0–7.0% (illustrative)Illustrative cap rates
How Arizona taxes a property sale
State treatment. Taxed as ordinary income — up to 2.5%.
Nonresident withholding. Arizona may require nonresident withholding at closing; a qualifying 1031 exchange generally defers it. Confirm specifics with your closing agent.
Does Arizona conform to Section 1031?
Yes — a qualifying exchange defers state tax alongside federal.
Arizona conforms to IRC §1031, so a qualifying exchange defers Arizona tax as well as federal tax.
Passive replacement property with a DST
Many Arizona owners use a Delaware Statutory Trust as replacement property — institutional real estate, professionally managed, that qualifies for 1031 treatment and can absorb both the equity and the debt from the sale.
Arizona taxes capital gains as ordinary income, up to 2.5%, with no separate long-term rate. Combined with the federal 20% rate and the 3.8% net investment income tax, a high-bracket Arizona seller can face roughly ~26.3% on a real estate gain.
Does Arizona recognize 1031 exchanges?
Yes. Arizona conforms to IRC §1031, so a properly structured exchange defers Arizona tax as well as federal tax.
Why use a 1031 exchange in Arizona?
To defer the tax on a large gain (up to about ~26.3% combined) and move from active landlording into passive, professionally managed real estate while keeping your full equity invested. These are Regulation D offerings for accredited investors.