Updated October 7, 2026. Quick answer: Generally no, if you qualify for the federal exclusion. Arizona says the “starting point for your Arizona return is your federal adjusted gross income”, so a gain excluded under section 121 stays out. Gain above it is taxed at the flat rate of “2025 New Tax Rate of 2.5% for All Income”, after a 25% subtraction for some long-term gains.
Arizona tax on home sale profit at a glance
| Item | What the documents say |
|---|---|
| Profit on your main home | Starts from federal adjusted gross income, which excludes a gain excluded under section 121 (the booklet does not mention section 121) |
| Rate on gain above the exclusion | Flat 2.5%, with a 25% subtraction of net long-term capital gain on assets acquired after December 31, 2011 |
| Collected at the sale | An escrow information return of the sale (A.R.S. 43-312); no withholding rate for sellers printed in the documents read |
| Source | Arizona Department of Revenue; Arizona Legislature |
What the Arizona documents say
The 2025 Form 140 booklet says the “starting point for your Arizona return is your federal adjusted gross income”. Under the federal statute, “Gross income shall not include gain from the sale or exchange” of a principal residence that meets the ownership and use tests, so an excluded gain never enters federal adjusted gross income. That is reasoning from two documents. The booklet does not mention section 121.
On the rate, the booklet says “Multiply line 45 by 2.5% (.025) and enter the result.” It also says “You may subtract 25 % (.25) of any net long-term capital gain” included in federal adjusted gross income from an asset acquired after December 31, 2011.
What the federal exclusion requires
Most state answers start here. The statute says “Gross income shall not include gain from the sale or exchange” of property that, during the five years before the sale, you owned and used as your principal residence for periods adding up to two years or more. The limit is “shall not exceed $250,000”, or $500,000 for a husband and wife who make a joint return and meet the statute’s conditions. See CMG’s home sale taxes page and exclusion calculator.
A worked example at a $400,000 gain
An illustration, not a return: a married couple in Arizona sells their main home with a gain of $400,000 and meets the federal ownership and use tests. The gain is below the $500,000 joint exclusion, so it is not in federal adjusted gross income and, on the documents read, $0 is taxed by Arizona. As a second illustration, computed below, suppose the gain were $600,000. The amount above the exclusion would then be $100,000. If the home was acquired after December 31, 2011 and the 25% subtraction applied, $75,000 would be taxed and, at 2.5%, the tax would be $1,875, before any other adjustment.
What is collected at the sale
Arizona’s statute A.R.S. 43-312 requires an “information return of sales of real property located in this state” from escrow agents. It is a reporting rule, and the statute text read prints no withholding rate. The nonresident booklet lists “the sale of Arizona real estate;” as Arizona-source income.
What changes in 2026
The documents read for Arizona announce no change for 2026 that is specific to the tax on a home sale. The forms and instructions read are for tax year 2025 or the newest page archived; check the state agency for 2026 forms when they are published.
What the documents do not say
- The booklet never names section 121, so conformity is reasoned from the federal starting point. Whether the 25% subtraction applies to a particular home depends on the date it was acquired and on the worksheet. The documents read print no seller withholding rate. The booklets are for tax year 2025.
Common mistakes
- Assuming the 25% subtraction applies to every home; the booklet limits it to assets acquired after December 31, 2011.
- Reading A.R.S. 43-312 as a withholding rule; the statute text read is an escrow information return.
- Assuming the answer for one state applies to another, or that the state answer changes the federal tax on the sale.
Related: home sale taxes, state tax on home sale profit, how Arizona taxes capital gains, Arizona retirement taxes, and home sale exclusion calculator.
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Answer againSources
- Arizona Form 140 Resident Personal Income Tax Return booklet 2025: https://azdor.gov/sites/default/files/document/FORMS_INDIVIDUAL_2025_140Booklet.pdf
- Arizona Form 140NR Nonresident Personal Income Tax Return booklet 2025: https://azdor.gov/sites/default/files/document/FORMS_INDIVIDUAL_2025_140NRBooklet.pdf
- A.R.S. 43-312 Information return of sales; nonresident real estate transactions; escrow agents; reports: https://www.azleg.gov/ars/43/00312.htm
- 26 U.S.C. 121, Exclusion of gain from sale of principal residence (U.S. Code, GovInfo): https://www.govinfo.gov/content/pkg/USCODE-2023-title26/html/USCODE-2023-title26-subtitleA-chap1-subchapB-partIII-sec121.htm
Sources: the primary documents linked above, read on October 7, 2026. General information, not tax advice. Your own facts decide the outcome, and a tax professional or the state agency itself is the right place to confirm anything consequential.