# 1031 Exchange Arizona: State Tax, Recording Rules and DSTs

> Arizona follows the federal 1031 deferral and taxes gains at a flat 2.5%, with a 25% subtraction for some long-term gains. See the rules, forms and math.

Source: https://baker1031.com/learn/1031-exchange-arizona


By Jerry Baker, Founder, Baker 1031 Investments. Updated October 28, 2026. Topic: 1031 Exchanges. Draft for review; not yet approved by Aurora Securities.

## The short answer

A 1031 exchange in Arizona is a swap of investment real estate for like-kind property that defers federal tax on the gain, and Arizona's income tax generally follows that deferral. If you sell without exchanging, Arizona taxes the gain at 2.5%, after a 25% subtraction for long-term gains on assets acquired after 2011.

## Key takeaways

- Arizona's income tax starts from your federal adjusted gross income. When a valid exchange defers the federal gain, Arizona generally defers it as well.
- For tax year 2023 and later, the Arizona Department of Revenue lists the individual rate as 2.5% of Arizona taxable income.
- Arizona lets you subtract 25% of net long-term capital gain from assets acquired after December 31, 2011. If the acquisition date can't be verified, the subtraction isn't allowed.
- Nonresidents who sell Arizona real estate have Arizona-source income and generally file Form 140NR. Californians who exchange into Arizona property also keep filing California's Form FTB 3840.
- Every deed recorded in Arizona needs an affidavit of property value. Arizona's constitution bars new taxes on transferring real property that weren't in place on December 31, 2007.
- A Delaware statutory trust (DST) interest can qualify as replacement property if the 1031 rules are met. DSTs are hard to sell, distributions are not guaranteed, and you could lose all the money you invest.

## What makes a 1031 exchange in Arizona different?

Start with what is not different. The exchange itself is a federal tax rule, and it works the same way in Phoenix as it does in Boston. [Section 1031](https://www.law.cornell.edu/uscode/text/26/1031) says "No gain or loss shall be recognized on the exchange of real property" used in a business or held for investment when it is traded for like-kind real property that you will also use in a business or hold for investment.

The short version of the federal mechanics: a **qualified intermediary (QI)**, an independent company, holds your sale proceeds. You have 45 days to name the replacement property in writing. You close within 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first. My guide to [the federal exchange rules](/learn/1031-exchange-rules) walks through each requirement, and my guide to the [45-day identification rules](/learn/1031-identification-rules) covers how to name properties.

So what changes in Arizona? Three things, mainly:

1. **How the state taxes a gain you don't defer.** Arizona's flat rate and its capital gain subtraction keep the state bill modest next to the federal bill. That changes the math on partial exchanges and on whether to exchange at all.
2. **Who has to file in Arizona.** Out-of-state owners of Arizona property file Arizona nonresident returns when they sell.
3. **Recording rules at closing.** Arizona requires an affidavit of property value with every deed and limits new transfer taxes in its constitution.

For a side-by-side look at how other states handle these same questions, see my [guide to 1031 exchange rules by state](/learn/1031-exchange-by-state).

## How does Arizona tax a gain on investment real estate?

Arizona doesn't have a separate capital gains tax. A gain on real estate is part of your regular Arizona income. Two features shape the bill.

### The 2.5% rate

The [Arizona Department of Revenue](https://azdor.gov/individuals/withholding-calculations) says, "For tax year 2023 and beyond, the tax rate for Arizona taxable income is 2.5%." The department's [tax table page](https://azdor.gov/forms/individual/form-140-x-y-tables) also explains that for those years there are no X and Y tax tables to post "due to Arizona's flat tax rate of 2.5%."

A **flat tax** means one rate for every dollar of taxable income. Unlike a graduated tax, a large one-time gain doesn't push part of your income into a higher state bracket. The rate on the first dollar and the millionth dollar is the same.

### The 25% subtraction for long-term gains

Arizona law also takes part of a long-term gain out of the tax base. Under [A.R.S. § 43-1022](https://www.azleg.gov/ars/43/01022.htm), paragraph 22, you may subtract "twenty-five percent of the net long-term capital gain included in federal adjusted gross income" for taxable years after 2014.

A **long-term capital gain** is a gain on an asset you held for more than one year. **Net** means after subtracting long-term losses.

The subtraction has a condition. It applies only to gain from assets acquired after December 31, 2011. The statute adds that "If the date an asset is acquired cannot be verified, a subtraction under this paragraph is not allowed."

Two related details come from the same paragraph:

- **Gifts and inheritances.** If you received the asset by gift or at someone's death, you are treated as acquiring it when the person who gave it to you did.
- **Earlier years.** Lower percentages applied in 2013 (10%) and 2014 (20%). For a sale today, the 25% figure is the one that matters.

### Why the acquisition date gets tricky after an exchange

Here is a question to raise with your CPA early. Say you bought a rental in 2008, exchanged it in 2016 for your current property, and now plan to sell. Is your current property "acquired" in 2016 for the Arizona subtraction, or does the 2008 date carry through the exchange?

Federal law, in [Section 1223(1)](https://www.law.cornell.edu/uscode/text/26/1223), generally lets your holding period carry over in an exchange. That applies when the new property takes the old property's basis. The Arizona statute looks at the date an asset is acquired. It also requires that date to be verifiable. How those rules fit together for exchanged property is a technical question. The answer can change your Arizona bill. Bring every closing statement from each link in your exchange chain.

### Arizona follows the federal deferral

Under [A.R.S. § 43-1001](https://www.azleg.gov/ars/43/01001.htm), "Arizona gross income" of a resident individual means "the individual's federal adjusted gross income for the taxable year, computed pursuant to the internal revenue code." Arizona then makes its own additions and subtractions.

The practical effect: when a 1031 exchange keeps a gain out of your federal adjusted gross income, that gain generally starts outside your Arizona return too. When part of an exchange is taxable, such as cash you keep, that taxable part flows into Arizona income and gets the Arizona treatment above.

## Arizona tax on a taxable sale vs. a 1031 exchange

The table below compares an Arizona resident's taxes on selling Arizona investment property outright and exchanging it. It reflects the rules cited on this page and isn't tax advice.

| Item | Outright sale | Full 1031 exchange | Exchange with leftover cash |
|---|---|---|---|
| Federal tax on long-term gain (up to 20%) | Due | Deferred | Due on the taxable part |
| Federal tax on depreciation gain (up to 25%) | Due | Deferred | Can be due on the taxable part |
| Federal net investment income tax (3.8%) | Due above the threshold | Deferred | Due on the taxable part, above the threshold |
| Arizona income tax at 2.5% | Due | Deferred | Due on the taxable part |
| Arizona 25% long-term gain subtraction | Applies if acquired after 2011 and the date is verifiable | Not needed | Can apply to the taxable long-term part |
| Affidavit of property value at recording | Required | Required for each deed | Required for each deed |
| Form 8824 | Not used | Filed with the federal return | Filed with the federal return |

The right column matters most in Arizona. Because the state rate is low, the extra state cost of keeping some cash is small next to the federal cost. My guide to [taking cash out in a partial exchange](/learn/partial-1031-exchange-boot) explains how that taxable piece, called **boot**, is measured.

## Worked example: selling a Phoenix-area rental

The numbers below are hypothetical and rounded. No real person, property or offering is behind them. Federal rates assume the top brackets, and the whole gain is treated as long-term to keep things simple. Your CPA should run your actual figures.

### The setup

Say you bought a fourplex in Maricopa County in 2014 for $1,000,000. Over the years, you claimed $300,000 of depreciation, which is the yearly deduction for wear on the building. That lowered your **adjusted basis**, your tax cost, to $700,000.

You sell in 2026 for $1,500,000 and pay $90,000 in selling costs.

### Your gain

$1,500,000 − $90,000 − $700,000 = **$710,000**

### The Arizona bill if you don't exchange

You bought in 2014, after December 31, 2011, and you have the closing statement to prove it. So you can subtract 25% of the net long-term gain.

- Gain included in federal adjusted gross income: $710,000
- 25% subtraction: $710,000 × 25% = $177,500
- Gain left in Arizona taxable income: $532,500
- Arizona tax at 2.5%: $532,500 × 2.5% = **$13,312.50**

### The federal bill if you don't exchange

- Gain tied to past depreciation, at a rate as high as 25% ([Section 1(h)](https://www.law.cornell.edu/uscode/text/26/1)): $300,000 × 25% = $75,000
- The rest of the long-term gain, at 20%: $410,000 × 20% = $82,000
- The 3.8% tax on the full gain: $710,000 × 3.8% = $26,980
- **Federal total: $183,980**

[Section 1411](https://www.law.cornell.edu/uscode/text/26/1411) imposes that 3.8% net investment income tax. Joint filers owe it once modified adjusted gross income passes $250,000; for most other filers the line is $200,000. The 25% rate applies to the part of the gain tied to past depreciation, which my [depreciation recapture guide](/learn/depreciation-recapture) explains.

### Putting it together

| Tax | If you sell outright | If you complete a full exchange |
|---|---|---|
| Federal | $183,980 | Deferred |
| Arizona | $13,312.50 | Deferred |
| Total due now | $197,292.50 | $0 |

The Arizona share is real money, but the federal share is roughly 14 times larger. For most Arizona sellers, the federal bill drives the decision to exchange.

### What if you'd bought before 2012?

Now change one fact. Say you bought the same fourplex in 2009. The 25% subtraction isn't available, so the full $710,000 stays in Arizona taxable income.

$710,000 × 2.5% = **$17,750**

That is $4,437.50 more in Arizona tax on the same gain, just because of the purchase date. It's a small reason, on its own, to keep careful records and to ask how your date carries through any past exchanges.

### What if you keep $100,000 in cash?

Say you exchange but keep $100,000 of the proceeds. That $100,000 is generally taxable boot. Assuming it is all long-term gain from a post-2011 asset, Arizona would tax $75,000 after the subtraction. At 2.5%, that's $1,875. Federal tax on the same $100,000 could be much higher, and the depreciation part is generally taxed first.

To model leftover cash on your own sale, try my [1031 boot calculator](/tools/1031-boot-calculator).

## When might an Arizona owner decide not to exchange?

A 1031 exchange is a tool, not a requirement. Some sellers look at the numbers and choose to pay the tax. The reasons usually come down to a few situations.

**The gain is small.** If your property has gone up only a little, or you bought recently, the federal and Arizona tax may be modest. The costs of an exchange, including QI fees and the pressure of the deadlines, may not be worth it.

**You need the cash.** If you plan to pay off other debt, fund a business or help family, you may want the money now. You can also do a partial exchange and keep some cash, as the example above shows.

**You have losses to use.** If other investments sold at a loss, those losses can offset part of the gain. Your CPA can tell you whether a taxable sale in a year with losses makes more sense than an exchange.

**You don't want more real estate.** An exchange only works if you buy more real property. If you're ready to be out of real estate entirely, the exchange simply moves that decision to a later date.

In each of these cases, the Arizona piece is often the smaller part of the decision. At 2.5%, with a possible 25% subtraction, Arizona's tax on a real estate gain is lower than the federal rates that apply to the same gain. Run both sets of numbers before you decide either way.

## Who owes Arizona tax when a nonresident sells Arizona property?

If you own Arizona property but live in another state, Arizona still has a claim on the gain.

### Arizona-source income

The [2025 instructions for Arizona Form 140NR](https://azdor.gov/sites/default/files/document/FORMS_INDIVIDUAL_2025_140NRi.pdf), the nonresident return, say that gains from selling Arizona real estate are Arizona-source income. Nonresidents with Arizona-source income generally must file Form 140NR, subject to filing thresholds in the instructions.

The same instructions let nonresidents take the 25% long-term gain subtraction, but only on the Arizona-source portion and only for qualifying assets acquired after December 31, 2011.

### Deadlines and estimated payments

For calendar year 2025, the instructions list April 15, 2026 as the due date, or October 15, 2026 with an extension. They also say estimated payments are generally required for 2026 if Arizona gross income was more than $75,000 ($150,000 for married filing jointly) in 2025 and is expected to be above that again in 2026. A large taxable sale, or a partial exchange with sizable boot, can put you over those amounts.

### If the nonresident exchanges

Say you live in another state and exchange Arizona property for new like-kind property. The federal deferral generally carries the Arizona gain forward too. If the new property is outside Arizona, ask your CPA how Arizona would treat that deferred gain when you eventually sell. California has a dedicated annual form for that situation, described below. The Arizona sources cited here don't describe one, so get a written answer for your facts.

## Buying Arizona replacement property after selling in California

Some people buying in Arizona sold California property to do it. California tracks that deferred gain after it leaves the state.

Here is the [California Franchise Tax Board's](https://www.ftb.ca.gov/file/personal/reporting-like-kind-exchanges.html) rule. If you trade California property for property in another state and defer part of the California-source gain, Form FTB 3840 is required. It is due for the exchange year and each year after, until that gain is taxed.

Here's what that means for an Arizona buyer. Say you exchange a San Diego rental into a Scottsdale retail building. Every year, you file FTB 3840 with California, even if you've moved to Arizona and have no other California income. When you sell the Scottsdale building and don't exchange again, California expects the deferred gain to show up on that year's California return. Arizona may also tax gain on that sale, since it is Arizona real estate. How any credit between the two states works is something to sort out with a CPA who handles both.

My [California 1031 exchange guide](/learn/1031-exchange-california) covers the California side in detail.

## What happens at an Arizona closing?

Arizona's recording rules don't decide whether your exchange qualifies, but they show up on every closing.

### The affidavit of property value

Under [A.R.S. § 11-1133](https://www.azleg.gov/ars/11/01133.htm), each deed or contract for the sale of real property must have an affidavit of value attached when it's recorded. It's signed by the seller and the buyer, or their agents, on a form approved by the Department of Revenue. The county recorder must refuse to record a deed without a complete affidavit unless an exemption applies.

The affidavit asks for the sale date, the total price, the cash down payment and the type of financing. One of the financing choices listed in the statute is a property exchange. It also asks whether personal property worth 5% or more of the price went to the buyer. That detail matters, because personal property is not like-kind to real property under Section 1031.

### Exemptions from the affidavit

[A.R.S. § 11-1134](https://www.azleg.gov/ars/11/01134.htm) lists deeds that don't need an affidavit. Several involve transfers for no or nominal payment, such as a member deeding property to its own LLC or a trustee deeding to a trust beneficiary. Those can come up when investors restructure title before an exchange. Your escrow officer and attorney will decide which, if any, applies.

### No new transfer taxes

Some states charge a tax every time real property changes hands. Arizona's constitution, in [Article 9, Section 24](https://www.azleg.gov/const/9/24.htm), says the state and local governments "shall not impose any new tax, fee, stamp requirement or other assessment, direct or indirect," on transferring an interest in real property. It doesn't apply to any tax or fee "in existence on December 31, 2007." Your settlement statement will still show recording fees and other closing costs.

## Arizona investors buying in other states

Many Arizona owners exchange into property outside the state. Federal law allows it. Under [Section 1031(h)](https://www.law.cornell.edu/uscode/text/26/1031), the only geographic line is the national border. Property in the United States and property abroad can't be swapped for each other, but Arizona-to-Ohio or Arizona-to-Florida can work.

The trade-off is state filing. If your replacement property sits in another state with an income tax, that state may tax your share of rent and, later, the gain on a sale. As an Arizona resident, you would generally report that income in Arizona too. Ask your CPA how the two states' returns fit together and whether any credit for tax paid to the other state applies.

DSTs can make this more involved. One DST may own property in a single state, or a portfolio across several. Before you invest, ask the sponsor which states' returns investors typically file.

## What are the steps for an Arizona 1031 exchange?

Here are the steps with the Arizona-specific checks built in.

### Step 1: Pull your acquisition records

Find the closing statement for when you bought the property, and for each earlier property if you've exchanged before. That record supports the 25% subtraction if any part of the gain becomes taxable.

### Step 2: Estimate both tax bills

Ask your CPA for a federal estimate and an Arizona estimate, with and without an exchange. Include the 3.8% tax. This shows how much a full exchange defers and what any boot would cost.

### Step 3: Choose a QI and sign before closing

The exchange agreement must be signed before the sale closes. Your QI holds the money in your place. If you or your agent touch the proceeds, the exchange generally fails, so route every dollar through the QI.

### Step 4: Close the sale

Your escrow officer prepares the deed and the affidavit of property value. Check that the affidavit reflects the exchange and that no personal property is lumped into the real estate price without being separately accounted for.

### Step 5: Identify replacement property by day 45

Put your list in writing, sign it, and deliver it to your QI within 45 days of the sale. A backup only counts if you named it in writing by day 45. DST interests can be listed like any other property.

### Step 6: Close on the replacement property

You must receive the new property within 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first. Use my [1031 exchange deadline calculator](/tools/1031-exchange-deadline-calculator) to see both dates for your sale.

### Step 7: File the right returns

File IRS [Form 8824](https://www.irs.gov/forms-pubs/about-form-8824), which the IRS says is used "to report each exchange of business or investment property for property of a like kind." File your Arizona return as a resident, or Form 140NR as a nonresident. If you came from California, add FTB 3840.

### Step 8: Keep the chain of records

Store the QI agreement, identification letter, closing statements and affidavits for every exchange. You may need them decades from now to prove basis or acquisition dates.

## An Arizona exchange on one timeline

Dates are easier to manage when they sit in one place. This table assumes a calendar-year individual taxpayer who sells in 2026. The tax-return dates for 2026 returns aren't in the sources above, so confirm them with your CPA when the time comes.

| When | What happens | Arizona angle |
|---|---|---|
| Before listing | CPA estimate, QI chosen, acquisition records gathered | Confirms whether the 25% subtraction would apply to any taxable part |
| Closing day (day 0) | Sale closes, QI receives the proceeds | Deed recorded with an affidavit of property value |
| Day 45 | Written identification delivered to the QI | Out-of-state and DST choices should be on the list by now |
| Day 180, or the return due date if earlier | Replacement property received | File a federal extension if the return due date would come first |
| Tax-filing season | Form 8824 with the federal return | Arizona resident return, or Form 140NR for a nonresident |
| Following year | Estimated payments, if required | Large boot can trigger Arizona estimated payment rules |
| Every year after | Keep records, and file FTB 3840 if the chain began in California | Acquisition records support any future subtraction claim |

## How does community property affect an Arizona exchange?

Arizona is one of nine community property states listed in [IRS Publication 555](https://www.irs.gov/publications/p555). **Community property** is a system that generally treats what spouses earn or buy while married as owned half by each.

That matters for long-term exchange planning. Many investors defer gain through several exchanges and plan to hold the last property for life. At death, federal law generally resets the tax cost of inherited property to its value. Publication 555 says that after one spouse's death, the full fair market value of the couple's community property generally becomes the basis for all of it. The condition is that at least half of the community interest's value counts in the estate of the spouse who died.

In plain terms, both halves of community property can get a new basis, not just the half that belonged to the spouse who died. The publication also notes this doesn't apply to registered domestic partners. How a property is titled, and whether it truly is community property, decides whether the rule helps. Ask your estate attorney to review title on your replacement property soon after your exchange closes.

## Questions to ask before you list your Arizona property

A short list of questions, asked early, can save money later. Bring these to your CPA, your attorney and your QI:

- **When did I acquire this property for Arizona purposes?** Include any earlier exchanges, gifts or inheritances in the answer.
- **Is all of my gain long-term?** Property held one year or less doesn't produce long-term gain, so the 25% subtraction wouldn't apply.
- **How much depreciation have I taken?** That figure drives the federal 25% portion of the bill if any gain becomes taxable.
- **Who owns the property on paper?** The owner on the deed is generally the one who must do the exchange. An LLC, a trust or a couple holding title as community property can each change the plan.
- **Do I have a mortgage?** To defer all the gain, you generally need to replace the debt you pay off, either with new debt or with added cash.
- **Will I keep any cash?** If so, estimate the boot, the federal tax, the Arizona tax and any estimated payment.
- **Am I a California exchanger?** If your chain started there, keep the FTB 3840 filings current.
- **Do I want to keep being a landlord?** Your answer decides whether you look at another building, a DST, or a mix.

## Can Arizona investors use a DST in a 1031 exchange?

They can, if the interest qualifies. Structured correctly, a trust interest of this kind can qualify as replacement property. A **Delaware statutory trust** is a trust that holds title to investment real estate, with many investors each owning a fractional beneficial interest. A **sponsor**, the real estate company that sets up the trust, handles the property.

The IRS position comes from [Revenue Ruling 2004-86](https://www.irs.gov/pub/irs-drop/rr-04-86.pdf): an owner can trade real property for an interest in a trust like the one it describes, as long as the rest of Section 1031 is satisfied. For the structure, fees and trade-offs, see my [DST guide](/learn/dst-guide).

### Where DSTs may fit for Arizona sellers

- **Ending landlord duties.** A DST interest is passive. You don't handle tenants or repairs.
- **Matching your sale amount.** Since DSTs are sold in fractional amounts, you can invest close to your exact proceeds, which can help reduce leftover boot.
- **Backup identifications.** The trust already owns the property, which can make a DST useful as a backup on your 45-day list.
- **Spreading across properties.** One sale can be divided across several DSTs with different sponsors, property types and states.

### What you give up

DSTs are securities, and most are offered only to **accredited investors**. That generally means meeting SEC income or net worth tests, which my [accredited investor guide](/learn/accredited-investor) explains. The SEC's bulletin on [private placements](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/private) tells investors to be ready to hold these securities with no set end date.

### Questions for a DST sponsor

If you're weighing a DST as an Arizona investor, add these questions to the usual review:

- In which states does the trust own property, and which nonresident returns do investors usually file?
- How much debt does the trust carry, and does it cover the debt you need to replace?
- What is the projected hold, and what happens if the sponsor can't sell on schedule?
- What fees come out before distributions, and where are they disclosed in the memorandum?

You also give up control. The sponsor decides when to sell, how to manage, and whether to refinance. Distributions are not guaranteed; a sponsor can lower or suspend them. If the property loses value, you could lose all of the money you put in. Fees reduce what you receive.

## Mistakes to avoid in an Arizona 1031 exchange

1. **Assuming the low state rate makes an exchange pointless.** In the example above, federal tax was roughly 14 times the Arizona tax. The federal side usually drives the decision.
2. **Losing the acquisition date.** Without a verifiable date, Arizona's 25% subtraction isn't allowed on any taxable part of the gain.
3. **Guessing how the date carries through a past exchange.** Ask your CPA which acquisition date Arizona will use for property you received in an earlier exchange.
4. **Forgetting Form 140NR as an out-of-state owner.** Gains on Arizona real estate are Arizona-source income.
5. **Missing estimated payments.** A taxable sale or large boot can trigger Arizona estimated payment rules for the following year.
6. **Dropping FTB 3840.** If your exchange chain started in California, that filing continues every year until the gain is recognized.
7. **Mixing personal property into the price.** Furniture or equipment sold with a building is not like-kind real property. The affidavit asks about it, and so will the IRS.
8. **Retitling property too close to the sale.** Moving property in or out of an LLC or trust can raise questions about who is doing the exchange. Plan any change with your attorney well ahead.
9. **Buying out of state without a filing plan.** Another state's income tax can apply to rent and future gains.
10. **Treating a DST as liquid.** You generally can't sell a DST interest on demand, so keep other money for emergencies.

## What my data shows

These numbers come from [my offering records](/data/dst-offerings) as of October 2026: 76 DST offerings from 38 sponsors. They cover only the offerings on my list and are not a forecast for any future offering, and they are not a recommendation of any one of them.

### Where the property is

The most useful number for an Arizona investor thinking about out-of-state replacement property is the location spread. In my offering records as of October 2026, locations span 33 states; the most common are Florida (14), Texas (13), North Carolina (8), Georgia (7).

That means an Arizona seller who uses DSTs will often end up owning property in other states. Each of those states has its own income tax rules for nonresidents, so ask about filings for each offering.

### What sponsors project

In my offering records as of October 2026, across the 71 offerings that published one, projected year-1 distribution rates had a median of 4.7% and ranged from 4.0% to 9.0%. A projection is not a promise. Distributions are not guaranteed and may come in below the projection.

### What kind of property

In my offering records as of October 2026, multifamily is the largest group, at 31 offerings (41%). Industrial follows at 18 (24%), then net lease at 15 (20%, including energy royalty programs). The rest are self-storage (5), retail (4) and medical office (3).

### What's available

Availability shifts. In my offering records as of October 2026, 16 offerings were open, 6 had limited availability, 24 were under review, 25 were closed, and 5 were ones I reviewed and passed on. For a 45-day identification window, that churn is a reason to start looking before your sale closes.

## Working with me on an Arizona exchange

I founded Baker 1031 Investments, and [my background](/about) is in real estate acquisitions, management and development. Each DST gets a review from my team and me in five areas: broker-dealer review, investment manager audit, investment offering review, real estate assessment and institutional underwriting.

In a first meeting, we'd look at your timeline and your goals, then review [the offerings I currently have available](/invest). I'll explain why I'm considering each one, what I like and where I have reservations. Baker 1031 Investments, which is independent of Aurora, doesn't give tax, legal or accounting advice. Securities are offered through Aurora Securities, Inc., member FINRA/SIPC.

## Frequently asked questions

### Does Arizona recognize 1031 exchanges?

Yes, in effect, because Arizona builds its tax base from federal adjusted gross income. If Section 1031 keeps a gain out of that federal figure, Arizona generally doesn't tax it either. Any taxable part, such as boot, flows through to Arizona.

### What is the Arizona capital gains tax rate on real estate?

Arizona doesn't have a separate capital gains tax. Gains are taxed as regular income at 2.5% for tax year 2023 and later. You may subtract 25% of net long-term capital gain from assets acquired after December 31, 2011.

### Can I use the 25% subtraction if I bought my property before 2012?

No. The subtraction under A.R.S. § 43-1022 applies only to assets acquired after December 31, 2011, and only when the acquisition date can be verified. If your property came through an earlier exchange, ask your CPA which date applies.

### Do nonresidents pay Arizona tax when they sell Arizona rental property?

Generally yes. The Form 140NR instructions treat gains from selling Arizona real estate as Arizona-source income. Nonresidents with Arizona-source income generally must file Form 140NR.

### Does Arizona have a real estate transfer tax?

Arizona's constitution bars any new tax, fee or stamp requirement on transferring real property that wasn't in place on December 31, 2007. Deeds still need an affidavit of property value, and recording fees apply.

### Can an Arizona seller buy replacement property out of state?

Yes. Section 1031 lets you trade Arizona real estate for real estate in any other state, as long as you hold both for investment or business use. The state where the new property sits may tax your rent and future gain, so plan for extra filings.

### I exchanged California property for Arizona property. What do I file?

You generally file California Form FTB 3840 every year until the deferred California gain is recognized. If you later sell the Arizona property without another exchange, you report that deferred gain to California, and Arizona may tax gain on the same sale.

### Can I do a 1031 exchange from Arizona property into a DST?

You can, if the rules are met. Your DST interest can qualify as replacement property if the trust follows the structure in Revenue Ruling 2004-86 and every other Section 1031 rule is satisfied. Most DSTs are limited to accredited investors, they are hard to sell, and distributions are not guaranteed.

### How much Arizona tax does a 1031 exchange defer?

On a fully deferred exchange, it defers whatever Arizona would have taxed on that gain. In the hypothetical example on this page, that was $13,312.50 on a $710,000 gain, alongside $183,980 of federal tax.

### Does Arizona tax the cash I keep from an exchange?

Generally yes. Cash you keep, called boot, is taxable federally and flows into Arizona income at 2.5%. If it is long-term gain on an asset acquired after 2011, the 25% subtraction can reduce the Arizona amount.

## Before you act

Everything here is general education about Arizona and federal rules as of October 2026, not tax, legal or investment advice. Tax rates, subtractions and filing rules can change, and small facts like an acquisition date can change the result. Please work through your own exchange with a CPA, an attorney and a qualified intermediary before you sign a contract. DSTs are sold only through an offering's private placement memorandum, and only to investors who qualify.

## Sources

- [26 U.S.C. § 1031, Exchange of real property held for productive use or investment (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1031)
- [26 U.S.C. § 1, Tax imposed, including § 1(h) capital gains rates (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1)
- [26 U.S.C. § 1411, Net investment income tax (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1411)
- [26 U.S.C. § 1223, Holding period of property (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1223)
- [IRS, About Form 8824, Like-Kind Exchanges](https://www.irs.gov/forms-pubs/about-form-8824)
- [IRS Revenue Ruling 2004-86](https://www.irs.gov/pub/irs-drop/rr-04-86.pdf)
- [IRS Publication 555, Community Property](https://www.irs.gov/publications/p555)
- [Arizona Department of Revenue, Withholding calculations](https://azdor.gov/individuals/withholding-calculations)
- [Arizona Department of Revenue, Form 140 X & Y tables](https://azdor.gov/forms/individual/form-140-x-y-tables)
- [Arizona Department of Revenue, 2025 Form 140NR instructions](https://azdor.gov/sites/default/files/document/FORMS_INDIVIDUAL_2025_140NRi.pdf)
- [A.R.S. § 43-1001, Definitions](https://www.azleg.gov/ars/43/01001.htm)
- [A.R.S. § 43-1022, Subtractions from Arizona gross income](https://www.azleg.gov/ars/43/01022.htm)
- [A.R.S. § 11-1133, Affidavit of legal value](https://www.azleg.gov/ars/11/01133.htm)
- [A.R.S. § 11-1134, Exemptions](https://www.azleg.gov/ars/11/01134.htm)
- [Arizona Constitution, Article 9, Section 24](https://www.azleg.gov/const/9/24.htm)
- [California Franchise Tax Board, Reporting like-kind exchanges](https://www.ftb.ca.gov/file/personal/reporting-like-kind-exchanges.html)
- [Investor.gov, Private Placements under Regulation D](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/private)

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Securities are offered through Aurora Securities, Inc., member FINRA/SIPC. Baker 1031 Investments, LLC is independent of Aurora Securities, Inc. and is not a registered broker-dealer or investment adviser. This content is general education, not investment, tax, or legal advice, and is not an offer to buy or sell securities. Offers are made only through the offering documents to eligible investors, generally accredited investors. DST interests are illiquid, distributions are not guaranteed, and you can lose your entire investment.

Contact: Jerry Baker, Baker 1031 Investments · hello@baker1031.com · (415) 965-0552 · https://baker1031.com/contact