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.
The Arizona tax math
Here's the tax stack on a long-held rental sold for a $1.5M gain (excludes depreciation recapture, taxed separately at up to 25%):
| On a $1.5M gain | Tax |
|---|---|
| Federal long-term capital gains (20%) | $300,000 |
| Net investment income tax (3.8%) | $57,000 |
| Arizona income tax (2.5%) | $37,500 |
| Total if you simply sell | $394,500 |
| Tax if you 1031 into a DST | $0 deferred |
In Arizona's top bracket, roughly the combined rate above goes to tax if you sell outright — versus $0 now with a qualifying 1031 exchange. Run your Arizona numbers →
Arizona 1031 rules
Rules summarized as of 2026 — verify with your tax advisor.
Conforms to federal §1031
Arizona conforms to IRC §1031, so a qualifying exchange defers Arizona tax as well as federal tax.
Withholding at sale
Arizona may require nonresident withholding at closing; a qualifying 1031 exchange generally defers it. Confirm specifics with your closing agent.
How gains are taxed
Taxed as ordinary income — up to 2.5%.
Arizona market snapshot
Illustrative — wire to a market-data feed; refreshed quarterly.
Baker 1031 in Arizona
Realized (acquired, held, sold) programs on Arizona assets. Joined from full-cycle-deals.csv; sponsor-reported, net-to-investor, not independently verified; past performance ≠ future results.
| Program | Sponsor | Avg annual | Equity × | Hold |
|---|---|---|---|---|
| U-Like Buffet / HomeTown Buffet — Tucson | AEI Capital Corporation | 5.91% | 1.74x | 23.33 yr |
| Cielo on Gilbert — Phoenix | Bluerock | 140.23% | 4.27x | 1.83 yr |
| Encore Chandler Development — Chandler | Bluerock | 55.24% | 1.3x | 1.83 yr |
| Denim — Scottsdale | Bluerock | 52.78% | 3.24x | 3.25 yr |
| Avenue 25 — Phoenix | Bluerock | 51.93% | 2.97x | 2.75 yr |
| The District at Scottsdale — Scottsdale | Bluerock | 25.16% | 1.4x | 1.58 yr |
| Renew 3030 — Mesa | Bluerock | 10.91% | 1.12x | 1.17 yr |
| CS1031 Crossroads Apartments, DST — Phoenix | Capital Square | 18.35% | 1.45x | 2.3 yr |
See every Arizona deal in the Data Center →
Current offerings for Arizona investors
| Offering | Sponsor | Type | Status |
|---|---|---|---|
| AEI Healthcare Portfolio VII DST | AEI Capital Corporation | Healthcare | Available |
| Blue Door Property III, DST | SmartStop | Self-Storage | Available |
DST sponsors based in Arizona
Learn more
Arizona FAQ
What is the capital gains tax rate in Arizona?
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.
Disclosures
This page is educational and is not investment, tax, or legal advice, or an offer to sell or a solicitation to buy any security. State tax and 1031 rules summarized here are general, current as of 2026, and not tax advice — verify with your CPA and attorney. For accredited investors only. Representatives may transact business only in states where registered or exempt. Securities offered through Aurora Securities, Inc., member FINRA/SIPC; Baker 1031 Investments, LLC is independent of Aurora. Performance shown is sponsor-reported, realized programs only, net of fees, not independently verified, and not indicative of future results.