Selling a Second Home in Arizona? Here’s How Capital Gains May Apply
If you’re selling a second home in Arizona, you may owe capital gains tax on the profit. Unlike a primary residence, second homes generally do not qualify for the full federal capital gains exclusion.
Whether your property is a vacation home, seasonal residence, or part-time property, understanding how taxes apply can help you plan more confidently.
This article is for educational purposes only and does not replace professional tax advice.
Do Second Homes Qualify for the Primary Residence Exclusion?
In most cases, no.
Under current IRS rules, homeowners may exclude up to:
- $250,000 in gains (single filers)
- $500,000 in gains (married filing jointly)
However, to qualify, you must generally:
- Have owned the home for at least 2 years
- Have lived in the home as your primary residence for at least 2 of the last 5 years
Second homes and vacation properties typically do not meet this requirement.
You can review official IRS guidance in IRS Publication 523 (Selling Your Home)
How Capital Gains Are Calculated
Capital gain is typically calculated as:
Sale Price – Adjusted Basis = Capital Gain
Your adjusted basis usually includes:
- Original purchase price
- Certain capital improvements
- Minus depreciation claimed (if applicable)
If you held the property for more than one year, long-term capital gains rates typically apply.
Because Arizona home values have appreciated significantly in recent years, many second-home owners may see sizable gains.
What If the Second Home Was Ever Rented?
If your second home was rented at any point:
- Depreciation may have been claimed
- Depreciation recapture may apply upon sale
- A 1031 exchange may be possible if the property qualifies as investment property
Depreciation recapture is generally taxed separately at a federal rate of up to 25%.
For more detail on rental property tax treatment, see:
👉 Taxes for Selling a Rental House in Phoenix
Can You Convert a Second Home Into a Primary Residence?
Some homeowners thinking about selling a second home in Arizona consider converting that property into their primary residence before selling in order to qualify for the capital gains exclusion.
While this strategy may be possible, IRS rules regarding residency periods and any prior depreciation can limit how much of the gain is actually excludable.
It’s important to consult a qualified tax professional before making this decision, especially when navigating Arizona‑specific tax implications.
Arizona State Tax Considerations
Arizona includes capital gains as part of state income tax.
You can review current guidance through the Arizona Department of Revenue
Because tax laws can change, always verify current rules with a licensed tax professional.
1031 Exchange: Is It an Option?
If the property qualifies as an investment property (not personal-use second home), a 1031 exchange may allow you to defer capital gains taxes by reinvesting proceeds into another qualifying property.
Key timelines include:
- 45 days to identify replacement property
- 180 days to close
Strict requirements apply, and not all second homes qualify.
Should You Sell Now or Wait?
Tax considerations are just one part of the decision. Arizona second-home owners may also consider:
- Market appreciation
- Maintenance costs
- Insurance premiums
- Property taxes
- Personal lifestyle changes
Understanding both financial and personal factors helps guide the right timing decision.
Frequently Asked Questions About Selling a Second Home
Do you pay capital gains tax on a second home?
In most cases, yes. Second homes typically do not qualify for the primary residence exclusion.
How much tax do you pay when selling a second home?
The amount depends on your capital gain, how long you owned the property, your income bracket, and whether depreciation was claimed.
Can I avoid taxes by living in the second home before selling?
Possibly, but IRS residency and ownership requirements must be satisfied, and prior rental use may affect eligibility.
Does Arizona tax second home sales?
Arizona includes capital gains as part of state income tax.
Talk With a Local Arizona Home Buyer
If you’re evaluating whether to sell your second home in Arizona, speaking with a local home buyer may help you understand your options clearly.
For over 20 years, Oak Street Properties LLC has worked with Arizona property owners to provide straightforward, transparent selling solutions.
👉 Request a Cash Offer
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