The Basics of Capital Gains Tax in Arizona
Table of Contents
What Are Capital Gains?
Capital gains occur when you sell an asset, like stocks, real estate, or a business, for more than your purchase price. Gains on assets held for one year or less are short-term and taxed as ordinary income. Gains on assets held for more than one year are long-term and, under federal law, generally qualify for lower tax rates (0%, 15%, or 20%, depending on income).
How Arizona Taxes Capital Gains in 2025
For the 2025 tax year, Arizona taxes short-term gains as ordinary income at the state’s flat income tax rate of 2.5%1. However, long-term gains benefit from a 25% subtraction from taxable income, effectively reducing the state tax rate on those gains to 1.875%1.
Key Rules for Capital Gains in Arizona
No Preferential Rate Beyond the Subtraction
Unlike federal law, which offers lower tax brackets for long-term gains, Arizona does not apply a separate rate structure—only the 25% subtraction for long-term gains. Without this subtraction, both short- and long-term gains would be taxed at the same 2.5% rate.
Residency Requirements and Tax Implications
- Residents: Taxed on all income, including capital gains from anywhere in the U.S. or abroad.
- Nonresidents: Only taxed on Arizona-source capital gains, such as profits from selling real estate located in Arizona.
Common Exemptions and Deductions for Arizona Capital Gains
Arizona Small Business Capital Gain Subtraction
Arizona offers a subtraction for gains from the sale of qualifying small business stock or assets, subject to eligibility rules. This aligns with federal Qualified Small Business Stock (QSBS) provisions but is determined at the state level.
Inherited Property and Primary Residence Exclusions
- Inherited Assets: Generally receive a “stepped-up basis” to the market value at the date of death, which can greatly reduce or eliminate capital gains tax upon sale.
- Primary Residences: If you meet the federal ownership and use tests, you may exclude up to $250,000 of gain ($500,000 for married couples) from both federal and Arizona taxation.
Retirement Accounts and Tax-Deferred Investments
Gains inside accounts like IRAs and 401(k)s are not taxed until withdrawal. When withdrawn, they are taxed as ordinary income at Arizona’s 2.5% rate in 20252. Early withdrawals may face additional federal penalties.
Tax Planning Strategies for Arizona Investors
Timing Asset Sales Strategically
Consider selling in years when your income is lower to reduce your total tax burden. The 25% subtraction for long-term gains still applies regardless of your income level, but federal rates may vary.
Offset Gains with Capital Losses
Use tax-loss harvesting—selling investments at a loss to offset gains. This strategy can reduce both federal and Arizona taxable income.
Use Qualified Accounts to Defer or Eliminate Gains
Invest through Roth IRAs, HSAs, or use 1031 exchanges for real estate to defer recognition of capital gains. Proper use of these accounts and strategies can help eliminate state tax on certain gains entirely.
Working with a Tax Advisor Familiar with Arizona Law
Arizona’s capital gains rules may be simpler than some states’, but they still offer opportunities for optimization, especially the 25% subtraction for long-term gains in 2025. A tax professional can help you navigate eligibility requirements, time your sales, and integrate state and federal strategies.
Reduce Your Tax Burden with Informed Capital Gains Planning
Understanding Arizona’s capital gains tax laws is a crucial step—but effective planning goes beyond the basics. Whether you’re selling investments, evaluating real estate, or managing a business exit, working with a fiduciary financial advisor can help you reduce unnecessary tax liability and align your decisions with long-term goals.
Want help evaluating your capital gains strategy? Schedule a consultation with Insight Wealth Strategies to get tailored advice on how to optimize your tax picture and preserve more of your wealth.
Key takeaways for 2025:
- Arizona’s flat income tax rate is 2.5% for all income, including capital gains.
- Long-term capital gains receive a 25% subtraction, lowering the effective state tax rate to 1.875%.
- Exemptions exist for inherited property, primary residences, and certain small business sales.
- Strategic planning—like timing sales, using losses, and leveraging tax-advantaged accounts—can reduce your state and federal liability.
Reviewed by,
Chad Seegers, CRPC®
Chad began his career with Sagemark Consulting in 2005 and then became a Select member of Sagemark’s Private Wealth Services which operated as a national resource for financial planners focusing on Advanced Strategies in the High Net Worth marketplace. Chad then began his partnership with Insight Wealth Strategies in 2013 focused on retirement planning primarily with Oil and Gas employees and executives. His primary areas of expertise are retirement, estate, and investment strategies as he serves as Investment Strategist for the financial planning team.
Sources:
- https://www.roberthalltaxes.com/news/arizona-capital-gains-tax-in-2025
- https://states.aarp.org/arizona/state-tax-guide
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Insight Wealth Strategies, LLC (IWS) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
