Capital Gains Tax When Selling Your Arizona Home: What You Need to Know in 2025
So, you’re selling your Arizona home in 2025. 🎉 Congrats!
But wait—Uncle Sam might want a piece of your profit.
Let’s talk about capital gains tax—but don’t worry, we’ll keep it simple.
This blog will walk you through exactly what you need to know to avoid overpaying taxes and maximize your money.
💰 What is Capital Gains Tax?
When you sell your home for more than you paid, that profit is called a capital gain.
If your home goes up $100,000 in value, that’s your gain—and that’s what the IRS looks at.
But here’s the GOOD NEWS...
🛡️ The Secret Weapon: Section 121 Exclusion
This is the IRS rule that lets most homeowners avoid paying taxes on up to $250,000 of profit (or $500,000 if you’re married).
It’s like a giant legal tax shield for sellers.
✅ Lived in your home for 2 of the last 5 years?
✅ Owned it for at least 2 of those years too?
BOOM—you may qualify!
🕒 Short-Term vs. Long-Term Gains
Here’s why this matters:
Short-term = Owned less than a year = Taxed like regular income (up to 37%) 😬
Long-term = Owned more than a year = Lower tax rates (0%, 15%, or 20%) 😎
Hold your home longer = Pay less tax. Simple as that.
🧾 How to Figure Out Your Gain
Use this simple formula:
Selling Price - Selling Costs - Adjusted Basis = Your Capital Gain
What’s your adjusted basis? It’s:
What you paid for the home
Big upgrades (like a new roof, kitchen, pool) – Selling expenses (like agent commission)
⚠️ Repairs don’t count. Only improvements that add value and last (like remodeling your kitchen) can raise your basis.
📉 Wait... What if I Used My Home for Business?
If you ever:
Rented out the home
Had a home office
Took depreciation on it
Then some of your gain might get taxed—even if you qualify for the exclusion. That’s called “depreciation recapture” and it’s taxed up to 25%.
Still, it’s better to know and plan for it than be surprised later.
🏜️ What About Arizona State Taxes?
Good news again!
Arizona has a flat income tax of just 2.5%.
Even better: If your gain is long-term, you only pay tax on 75% of it. That drops your real tax rate to just 1.875%!
And if your gain is fully excluded under Section 121, you may pay nothing at all to Arizona. Win-win!
⚠️ When the Exclusion Doesn’t Cover Everything
Watch out for these common situations:
❌ Didn’t live there long enough
❌ Sold a previous home in the last 2 years
❌ Profit over $250k/$500k
❌ Depreciation from rental or office
❌ You rented it before living in it
Even then, you may qualify for partial exclusions if you moved for a job, health reasons, or a major life event.
🧠 Do You Need to Report the Sale?
✅ If your profit is fully excluded and you didn’t get a Form 1099-S, you may not need to report it.
🚨 But if you do get a 1099-S or have any taxable gain, you’ll need to fill out a couple forms (Form 8949 + Schedule D). A good tax pro can help with this.
