The good news is that most Arizona homeowners won’t owe federal capital gains tax when they sell their PRIMARY residence. But if you’ve owned your home for many years, it’s worth understanding how the rules apply before you decide when to list.
Many homeowners who sell don’t owe federal capital gains tax because the IRS exclusion shields up to $250,000 in profit for single filers and $500,000 for married couples filing jointly. But if you live in Scottsdale, Paradise Valley, Arcadia, or neighborhoods known for luxury real estate and your home has appreciated significantly, gains above that threshold are taxable.
If you bought your home a decade ago, you’ve probably done well. Home values across much of Metro Phoenix have more than doubled since 2013. A home purchased for $600,000 might be worth $1.3 million or more today. That’s a $700,000 gain, and once you subtract the federal exclusion, a meaningful chunk of it may be taxable.
The Federal Exclusion and Where It Runs Out
To qualify for the $250,000 in capital gains from the sale of your primary home if you’re single, or $500,000 if you’re married filing jointly, you must have:
- Owned the home for at least two of the last five years
- Used it as your primary residence for at least two of the last five years
If you meet both criteria, the exclusion applies automatically. But in the luxury market, the exclusion often doesn’t reach far enough.
Say you bought a home in Paradise Valley in 2010 for $900,000. You’ve put $75,000 into improvements over the years. These increases to your cost basis matter. You’re selling now for $2.4 million. Your adjusted gain is roughly $1.425 million. After the $500,000 married exclusion, $925,000 is taxable.
One of the best things you can do before you list: pull together documentation of every capital improvement you’ve made. Every renovation, addition, or major system replacement increases your adjusted basis and reduces your taxable gain. Keep the receipts, and discuss with your CPA before you set a list date.
What Arizona Charges and a Bill That Could Change the Picture
Arizona taxes capital gains as ordinary income at a flat 2.5% state rate. As of January 1, 2026, the state expanded a 25% long-term capital gains subtraction to apply to all long-term gains, which drops the effective Arizona rate on qualifying gains to approximately 1.875%.
That’s meaningfully lower than most states. Arizona also has no state transfer tax unlike California, New York, or most Northeastern states, which is one of several reasons selling here is less costly than sellers coming from those markets often expect.
Arizona SB 1633
The Arizona Senate passed this bill in early 2026 on a 16-12 vote. It would create an unlimited state exemption on home sale gains for sellers who’ve owned their primary residence for at least five years, meaning zero Arizona state capital gains tax, regardless of how much the home has appreciated.
If it becomes law, the effective date would be 2027.
As of April 2026, SB 1633 still needs to clear the Arizona House and be signed by the governor. It faces political opposition. Critics argue it disproportionately benefits high-income sellers but it has passed one chamber. If you’re planning a sale later this year or into 2027, the timing of your closing could matter depending on where this bill lands.
What This Means for Your Net Proceeds
Capital gains tax is one of the easiest costs to overlook when estimating your net proceeds. Most sellers focus on commissions, title and escrow fees, recording costs, and paying off their mortgage. In Arizona, those expenses typically total 8–10% of the sale price. But for homeowners with gains that exceed the federal exclusion, capital gains tax can surpass every other closing cost combined.
Whether you’re considering selling in a lower-income year, evaluating how a potential 2027 closing could affect your taxes if SB 1633 becomes law, or simply want a clearer picture of what you’ll actually net, it’s worth running the numbers before you list. A pre-listing consultation lets us evaluate your specific situation so you can make informed decisions before you’re committed to a timeline.
Frequenty Asked Questions
Do I always have to pay capital gains tax when selling my house in Arizona?
Not necessarily. If your profit falls within the federal exclusion — $250,000 for single filers and $500,000 for married couples filing jointly — you won’t owe federal capital gains tax. You’ll also likely owe no state capital gains tax since Arizona’s rate applies to the same gain. Many sellers in average-priced markets won’t owe anything. In Scottsdale and Paradise Valley, where long-time homeowners often have gains well above those thresholds, it’s a different conversation.
What’s the difference between the federal exclusion and the actual capital gains tax rate?
The exclusion is the portion of your gain that’s completely tax-free. Any gain above it is taxable. Federal long-term capital gains tax rates run 0%, 15%, or 20% depending on your income. High earners often face the 20% rate plus a 3.8% Net Investment Income Tax. Arizona’s effective rate on long-term gains is approximately 1.875% as of 2026.
What is Arizona SB 1633 and when does it take effect?
SB 1633 is a bill passed by the Arizona Senate in early 2026 that would eliminate state capital gains tax on primary home sales for sellers who’ve owned their home for at least five years. As of April 2026, it still needs to clear the Arizona House and be signed by the governor. If passed, it would take effect in 2027. It’s pending, not law, but worth tracking if you’re planning a sale this year or next.
How do home improvements affect my capital gains tax when selling in Arizona?
Improvements increase your cost basis, which reduces your taxable gain. If you bought a home for $800,000 and put $100,000 into renovations, your adjusted basis is $900,000. On a $1.5 million sale, your taxable gain is $600,000 rather than $700,000. Keep records of every capital improvement — they can meaningfully reduce your tax bill.
Should I wait until 2027 to sell if Arizona SB 1633 passes?
That depends on your full financial situation. If your gain above the federal exclusion is substantial, waiting one year could save a meaningful amount in state capital gains tax. But the bill isn’t law yet, and your carrying costs, market conditions, and personal timeline all factor in. It’s worth modeling both scenarios with your agent and CPA before committing to a list date.
If you’re planning to sell your home and want to understand the full financial picture – not just what it might sell for, but what you’ll actually walk away with after closing costs and estimated tax exposure – schedule a consultation at kristabecka.com/contact. I’ll prepare a personalized net proceeds analysis and help you evaluate your options so you can make informed decisions with confidence.
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