StructuredSales.org
StructuredSales.org
Arizona's individual income tax is a flat 2.5%. Cities do not add an income tax on top of it. That is a low headline, and it is incomplete. A.R.S. § 43-1022 lets an individual subtract 25% of net long-term capital gain included in federal adjusted gross income, but only for gain from an asset acquired after December 31, 2011. On a qualifying asset the effective state rate is 1.875%. On a ranch, a building, or a company interest acquired before that date, the subtraction is zero and the rate is the full 2.5%. A gift or an inheritance does not reset the clock. The recipient is treated as having acquired the asset when the prior owner did.
A structured installment sale under IRC §453 still matters, mostly on the federal return. The 0%, 15%, and 20% long-term brackets, and the 3.8% net investment income tax, move when a large gain is split across years. Arizona's flat rate and flat subtraction do not. This page keeps those two results separate. The numbers are estimates.
A.R.S. § 43-1011 imposes the individual income tax. After the last step of the 2021 rate reduction, the tax is 2.5% of taxable income. The Department of Revenue's highlights for tax year 2025 describe that same 2.5% rate at every income level. House Bill 2918 in 2025 would have lowered the rate to 2.47% beginning in 2026. It did not become law. This page uses 2.5%. Arizona taxable income starts with federal adjusted gross income, minus subtractions and a deduction. There is no city or county individual income tax. Transaction privilege tax is a business-privilege tax. It is not an income tax on the seller's gain.
The capital-gain subtraction is paragraph 22 of A.R.S. § 43-1022. For taxable years beginning after December 31, 2014, an individual subtracts 25% of net long-term capital gain included in federal AGI from an asset acquired after December 31, 2011. A person who receives the asset by gift or at death is treated as having acquired it when the transferor did. If the acquisition date cannot be verified, the subtraction is not allowed. A different subtraction, paragraph 21, covers gain from an investment in a qualified small business certified by the Arizona Commerce Authority under § 41-1518. That is a program. It is not a general exclusion for selling any Arizona LLC.
Senate Bill 1331 in the 2025 regular session would have applied the 25% subtraction to all long-term gain starting in 2026, regardless of acquisition date. It did not become law. The December 31, 2011 date is still the statute. Families who have held ground since the 1970s or 1990s should plan on the full 2.5%, not on 1.875%.
Because Arizona begins with federal AGI, gain recognized under the installment method is generally in the Arizona computation in the year Form 6252 reports it. If the asset was acquired after 2011, each year's net long-term gain is the figure the 25% subtraction can reach, subject to federal Schedule D netting. If the asset was acquired earlier, none of those yearly slices qualify. Spreading a nonqualifying gain does not age it into a post-2011 asset.
Tax on qualifying gain is 2.5% times 75%, or 1.875%, whether the gain arrives in one year or seven. Tax on nonqualifying gain is 2.5% either way. The Arizona total does not fall because you deferred. The timing of the check does change. Federal tax is the layer that can be a different number. For 2026, Revenue Procedure 2025-32 sets the joint 0% long-term threshold at $98,900 of taxable income and the 15% threshold at $613,700. The 3.8% net investment income tax applies above $250,000 of joint MAGI. Those NIIT thresholds are not indexed.
Depreciation recapture is ordinary income in the year of sale under §453(i) and §1245, so it is outside the 25% subtraction. Unrecaptured section 1250 gain is taxed federally at up to 25%. Section 453A's interest charge applies above $5 million of installment obligations, and §453(e) and §453(g) limit related-party sales. The tax-treatment guide is the longer federal explanation. Arizona real property stays Arizona-source after a move. How much of the subtraction a nonresident claims on Form 140NR is a proration question this page does not restate.
A membership interest or a building bought in the Phoenix metro after 2011 is the subtraction's intended case. Precision machining, medical and dental practices, and small industrial buildings purchased in the last decade often have a closing statement that proves the date. Goodwill and a post-2011 equity interest can qualify to the extent the federal return calls the income long-term capital gain. Hot assets under §751, inventory, and depreciation recapture will not. The dental, medical, and business-sale pages cover that allocation. The Arizona subtraction sits on top of it.
Ranch and farm families in Cochise, Pima, Yavapai, and Yuma often fail the date test because a parent acquired the land before 2012. The heir keeps that acquisition date for the subtraction even when §1014 reset the federal basis at death. A 2020 inheritance of land bought in 1985 has a 2020 federal basis and a 1985 Arizona date. The farmland and inherited-farmland articles are about federal basis. Add the date test before copying them onto Form 140. A rental portfolio bought from 2006 through 2018 is not one subtraction: pre-2012 houses stay at 2.5%, later ones may get the 25% off, and recapture on all of them is ordinary and recognized up front. See the real-estate installment page, the landlord page, and the 1031 comparison. California can tax the same kind of gain at up to 13.3%. New Mexico, Utah, and Colorado use different rules.
A married couple bought 100% of a precision-machine LLC in Mesa in March 2016 for $500,000. In 2026 a buyer pays $1,900,000 for the membership interest. Their CPA treats $1,400,000 as long-term capital gain eligible for the federal 0/15/20% rates and for Arizona's 25% subtraction, because the interest was acquired after December 31, 2011. Any ordinary income under §751 on hot assets is excluded from this table and would be taxed in the year of sale. One spouse still earns $110,000. They file jointly, take the $32,200 standard deduction for 2026, and do not itemize. Other income uses Arizona's deduction, so the estimate applies the marginal rate to the gain: 2.5% times 75%.
The $1,900,000 is paid over seven years. Each year they recognize $200,000 of the modeled long-term gain. NIIT is 3.8% above $250,000 of joint MAGI. The table ignores interest, which would be ordinary and would not get the capital-gain subtraction, plus the time value of money and any deduction for state tax. Figures are rounded estimates, not a projection of savings.
| Estimate | Lump sum | Seven-year total |
|---|---|---|
| Long-term gain recognized | $1,400,000 | $1,400,000 |
| Federal tax at 0% / 15% / 20% | $250,040 | $187,845 |
| Federal NIIT at 3.8% | $47,880 | $15,960 |
| Arizona tax at 1.875% effective | $26,250 | $26,250 |
| Estimated total on the gain | $324,170 | $230,055 |
The illustrative difference is about $94,115, and it is federal. Arizona's $26,250 is 2.5% of the $1,050,000 left after the 25% subtraction, either in one year or seven. The lump sum taxes $864,100 at 20% and applies the NIIT to $1,260,000. Each installment puts $200,000 of gain on $77,800 of ordinary taxable income, so only $21,100 is at 0%. The same gain on a 1998 Cochise ranch, inherited without a new Arizona acquisition date, would be taxed at $35,000 instead of $26,250. Installment reporting would not close that $8,750 gap.
Arizona's individual income tax is a flat 2.5% of taxable income. There is no local income tax on individuals. Long-term gain on an asset acquired after December 31, 2011, may qualify for a 25% subtraction, which makes the effective rate on that qualifying gain 1.875%. Gain on an asset acquired earlier is taxed at the full 2.5%.
A.R.S. § 43-1022 treats a gift or death transferee as having acquired the asset when the transferor did. Land a parent bought in 1998 and you inherited in 2020 keeps 1998 as the acquisition date, so the subtraction is not allowed. If the date cannot be verified, the subtraction is not allowed.
Senate Bill 1331 in the 2025 regular session would have extended the 25% subtraction to all long-term capital gain beginning in 2026, without regard to acquisition date. It did not become law. The date limit in A.R.S. § 43-1022 remains. A different bill numbered SB 1331 in 2026 concerned nutrition assistance and is unrelated.
Arizona's rate is flat, and the 25% subtraction is a flat percentage of qualifying net long-term gain. Splitting that gain across years does not change the total Arizona tax. It changes when the tax is paid. Federal brackets and the 3.8% net investment income tax are where the amount can change. The example is an estimate under stated assumptions.
Arizona taxes nonresidents on Arizona-source income. Gain from real property in Arizona is Arizona-source, and installment payments on that sale generally remain so. How the 25% subtraction is applied on a nonresident return is a Form 140NR question for your preparer. A move does not, by itself, erase Arizona tax on Arizona land.
Last reviewed: October 22, 2026.
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