1031 Exchange & DST Investing in Arizona
Arizona conforms to Section 1031 and taxes capital gains at a low 2.5% flat rate with no clawback or nonresident withholding, making it one of the more straightforward states for exchangers. Phoenix and Tucson remain among the fastest-growing Sun Belt markets and draw substantial 1031 replacement capital.
State tax treatment of a 1031 exchange
Arizona conforms to the federal treatment of a Section 1031 exchange, so gain properly deferred at the federal level is also deferred for Arizona income tax. Arizona applies a flat 2.5% individual income tax rate, and capital gains are taxed as ordinary income at that rate when eventually recognized.
Arizona does not impose a nonresident seller withholding on real estate transactions and has no clawback or annual reporting requirement for gain deferred into property located outside the state.
Market snapshot
Phoenix is the state's dominant market and one of the largest in the Southwest, with Tucson a growing secondary metro. Multifamily and industrial and logistics space lead investor demand, supported by strong net-lease and build-to-rent activity across the metro Phoenix suburbs.
Sustained in-migration, corporate relocations, and semiconductor and advanced-manufacturing investment have driven above-average population and job growth. That growth, combined with relatively landlord-friendly conditions, continues to attract 1031 replacement capital from higher-tax coastal states.
Why 1031 & DST investors look here
- Low 2.5% flat rate and full Section 1031 conformity
- Rapid population and job growth in Phoenix and Tucson
- Deep multifamily, industrial, and net-lease inventory for replacement
Replacement-property options
Replacement property does not need to sit within Arizona — like-kind real estate is nationwide. Arizona owners commonly use DSTs, 721 UPREIT contributions, and Opportunity Zone vehicles to exchange into passively managed multifamily, industrial, and net-lease assets, whether keeping capital in fast-growing Arizona submarkets or diversifying nationally.
Frequently asked questions
Does Arizona tax a 1031 exchange?
Arizona conforms to Section 1031, so a properly structured exchange defers Arizona income tax on the gain; when the gain is eventually recognized it is taxed at the 2.5% flat rate.
Can I exchange Arizona property for out-of-state DSTs?
Yes. Like-kind property can be anywhere in the U.S., and Arizona has no clawback rule, so exchanging into out-of-state DSTs raises no special state filing.
Does Arizona withhold tax when a nonresident sells property?
No. Arizona does not impose a nonresident real estate withholding, though the federal FIRPTA rules can still apply to foreign sellers.
Gerald F. “Jerry” Baker, III — Founder & Managing Principal, Baker 1031 Investments · FINRA Series 22 / 63 · SIE. Read full bio →
State tax treatment is general and changes frequently; this page is educational and is not tax, legal, or investment advice. Confirm current state and local rules with your own CPA and attorney. Securities offered through Aurora Securities, member FINRA/SIPC. Real estate investments involve risk, including possible loss of principal.