By Justin Quen, CPA, Tax Editor
With the Arizona heat in full swing and the real estate market still buzzing, summer is a prime time to buy or sell a home. But beyond negotiating offers and scheduling inspections, smart tax planning can save you thousands when the transaction closes.
Mortgage Interest & Property-Tax Deductions
Most Arizona homeowners benefit from deducting mortgage interest and property taxes if you itemize. The IRS allows interest on up to $750,000 of mortgage debt (for loans made after December 15, 2017) and property taxes up to a combined state and local cap of $40,000. Given Arizona’s average property-tax rate of just 0.45%, this deduction can substantially reduce taxable income, especially early in the mortgage when interest payments are highest.
Selling? Use the Home Sale Exclusion
If you’re selling your primary residence, you may qualify to exclude up to $250,000 of gain ($500,000 if married filing jointly) from taxable income. Arizona follows the federal rules so a qualifying sale means you avoid state-level capital gains taxes on that excluded amount. Any remaining gain, however, is subject to both federal and Arizona taxes.
Plan for Capital Gains Tax on Home Sales
Arizona treats capital gains as ordinary income, with a flat 2.5% state income tax rate. But there’s a significant bonus: a 25% subtraction on long-term capital gains effectively reduces that rate to 1.875%. The subtraction applies to assets held over one year, including real estate, so timing matters.
Timing & Installment Sale Strategies
Splitting your profit across years can soften the tax impact. One option is an installment sale, which spreads your gain (and tax liability) over multiple years. This can help keep you in a lower tax bracket and reduce both state and federal taxes. Alternately, reinvesting via a 1031 exchange (for investment properties) allows you to defer recognition of gain, but that strategy doesn’t apply to your personal residence.
First-Time Buyers: Check for Down-Payment Programs
Arizona offers down-payment and closing-cost assistance for first-time homebuyers up to $30,000 for those at or below 80% of area median income. While not a tax credit per se, receiving aid allows you to preserve capital and may open the door to related mortgage interest deductions and, in some cases, a Mortgage Credit Certificate (MCC), which can shave federal tax bills.
Bottom Line
Whether buying or selling, good tax planning makes a big difference. From maximizing deductions to staging your sale for long-term capital treatment (not to mention tapping down-payment aid), proactive moves in July and August can yield significant financial benefits.
About the Author
Justin Quen is a Scottsdale native, licensed CPA, and graduate of the University of Arizona, where he earned his Master’s degree in Accounting. As the founder of his own accounting and tax practice, Justin works closely with individuals and small business owners, offering personalized services tailored to each client’s needs. His mission is to make expert financial advice more accessible to the Arizona community.
If you have any questions about tax planning, capital gains, or strategies like tax-loss harvesting, Justin is happy to help. You can reach him at justin@jqcpa.net.
