1031 Exchange & DST Investing in Phoenix, AZ
Phoenix is a leading industrial and semiconductor-manufacturing market with rapid population growth and a large apartment sector. Arizona conforms to the federal 1031 exchange and taxes capital gains at a flat 2.5% with no separate nonresident withholding, and DSTs are available to accredited investors nationwide.
State tax treatment of a 1031 exchange
Capital-gains treatment is set at the state level. Arizona conforms to Internal Revenue Code Section 1031, so a properly structured exchange defers federal and state tax on the gain; the state applies a flat 2.5% individual income tax rate, one of the lowest among states that tax income. See our Arizona state page for details.
Market snapshot
Greater Phoenix has become one of the country's most dynamic industrial markets, driven by a wave of semiconductor and advanced-manufacturing investment led by TSMC's large fabrication campus in North Phoenix and Intel's expansion in Chandler, plus a surge of data-center and logistics development. Industrial construction and absorption in the West Valley submarkets of Goodyear, Buckeye, and Glendale rank among the highest in the nation, while the East Valley around Chandler, Tempe, and Mesa concentrates technology and semiconductor employment. Multifamily and industrial are the dominant investment asset classes.
Phoenix has been one of the fastest-growing large metros in the country, and that in-migration fueled an outsized apartment construction pipeline. As record supply delivered, vacancy rose, rent growth cooled sharply from its pandemic-era peak, and cap rates widened from cycle lows, making the metro a clear example of near-term oversupply meeting strong long-run demand. For 1031 investors, Phoenix's semiconductor-driven job growth, industrial leadership, affordability relative to coastal California, and low flat state tax are why replacement capital continues to target it despite the recent rent reset.
Why 1031 & DST investors look here
- Major semiconductor and advanced-manufacturing investment led by TSMC and Intel
- One of the nation's top industrial and data-center construction markets
- Rapid in-migration and a low flat 2.5% state income tax
Replacement-property options
An investor selling a Phoenix property can defer gain by exchanging into DST interests, and the replacement property does not have to be in Arizona; like-kind treatment applies to real estate anywhere in the United States. Delaware Statutory Trusts let accredited investors reinvest exchange proceeds into professionally managed, institutionally sized properties, and a 721 UPREIT contribution or Qualified Opportunity Zone investment may fit certain goals. Suitability depends on individual circumstances and should be reviewed with qualified tax and financial professionals.
Frequently asked questions
Is Phoenix a good market for a 1031 replacement?
Phoenix offers strong semiconductor-driven job growth and industrial leadership but is absorbing a large apartment-supply wave that has softened rents. Whether it fits an exchange depends on your objectives and risk tolerance.
Does Arizona tax a 1031 exchange?
Arizona conforms to federal Section 1031, so a valid exchange defers state as well as federal tax on the gain. The state applies a flat 2.5% individual income tax and no separate nonresident real estate withholding.
Can I exchange Phoenix property for out-of-state DSTs?
Yes. Like-kind real estate can be located anywhere in the United States, so Phoenix sale proceeds can be exchanged into DSTs holding property in other states.
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.