Capital gains tax can take a big bite of your investment profits if you don’t plan. If you live in Arizona or own property there, you should understand how capital gains tax in Arizona affects you. This blog explores different strategies to avoid or reduce capital gains tax in Arizona, making sure you keep more of your hard-earned money. Whether you’re selling stocks, real estate, or other investments, knowing the ins and outs of Arizona’s tax rules can save you a lot of money.
What is Capital Gains Tax?
Capital gains tax is a tax on your profit when you sell an asset for more than you paid. This tax can affect your stocks, real estate, or other investments. The government wants a share of that profit when you sell something and make money from it.
There are two types of capital gains:
- Short-term capital gains occur when you sell your asset. It's considered short term if you’ve owned for one year or less. These gains are usually taxed higher, like your regular income.
- Long-term capital gains are when you sell an asset you’ve owned for over a year. These gains are taxed at a lower rate, which can save you money.
Does Arizona Have a Capital Gains Tax?
Arizona does have a capital gains tax. This tax is different from the federal capital gains tax. The state has its own rates and rules for calculating your debt. The Arizona capital gains tax rate can vary; it depends on your overall income and other factors.
How Much is Capital Gains Tax in Arizona?
Figuring out how much capital gains tax is in Arizona can be tricky, but it’s important to know. The amount you pay depends on several factors, including your total income and the type of asset you sold.
In Arizona, the capital gains tax rate can vary. The Arizona capital tax rate is lower than the federal capital gains tax rate for most people. However, the exact rate depends on your specific situation.
These are some factors that might affect capital gains tax in Arizona:
- How long you’ve owned your asset: If you sold an asset you owned for one year or less, it’s a short-term gain. These are usually taxed at your regular income tax rate of 2.5% in Arizona. If you owned the asset for more than one year, it’s a long-term gain. Long-term gains often have a lower tax rate.
- Your income level: Your total income also affects the Arizona capital gains tax rate. Higher-income might mean a higher tax rate, while lower-income might mean a lower rate.
5 Strategies to Avoid or Minimize Capital Gains Tax in Arizona
There are smart ways to avoid or minimize capital gains tax in Arizona.
1. Invest in Suitable Retirement Accounts
When you invest in retirement accounts like a 401k or an IRA, your investments grow tax-free until you withdraw them, usually in retirement. However, tax-deferred doesn’t mean tax-free. Since contributions are made with pre-tax dollars, you still pay capital gains tax in Arizona.
However, if you invest in a Roth IRA or Roth 401k, contributions are made with after-tax dollars. You don’t pay capital gains tax in Arizona for these types of retirement accounts.
2. Use a 1031 Exchange
A 1031 exchange lets you sell a property and reinvest your money in a similar property without immediately paying capital gains tax at both the federal and state levels, including in Arizona.
For example, let’s say you sell a rental property for $800,000 that you originally bought for $700,000. Instead of paying capital gains tax on the $100,000 profit, you can reinvest it in another rental property. This defers the taxes on the profit until you eventually sell the new property, at which point both federal and state taxes would apply.
3. Donate to Charity
Donating appreciated assets to charity is a powerful way to give back and reduce your tax burden. You can avoid paying capital gains tax in Arizona on these assets and get a tax deduction for the donation.
Look for investments, like stocks or real estate, that have increased in value since you bought them. Instead of selling these assets and donating the cash, you donate the assets directly to a qualified charity. You must ensure you donate to a qualified 501(c)(3) charitable organization.
Since you are donating the assets directly, you avoid paying capital gains tax in Arizona on the appreciated value. This also means you also get a charitable deduction at the fair market value of the donated assets.
4. Consider Tax-Loss Harvesting
If done correctly, tax loss harvesting is one way to avoid capital gains tax in Arizona. First, you must identify losing investments. Take a look at your portfolio and find investments that have lost value. Then, you need to sell these underperforming investments to realize the loss.
Ideally, you should have a professional help you through this process to ensure these losses offset any gains you’ve made from selling other investments. If you still believe in the potential of the sold investment, repurchase it after 30 days to avoid the wash sale rule.
5. Plan Your Sales for Long-Term Growth
Long-term capital gains tax in Arizona can save money if you plan your investments wisely. When you sell an asset you’ve owned for over a year, you can get a lower Arizona long-term capital gains tax to keep more of your profit. Holding onto your investments gives them more time to grow and appreciate in value. When you finally sell, this can lead to bigger profits and more favorable tax treatment.
Thinking long-term helps you plan for future financial goals. Whether it’s retirement, home buying, or paying for education, long-term investments can play a key role.
To take advantage of these benefits, make a plan for your investments. Decide which assets you can hold onto for more than a year. This will help you avoid higher short-term tax rates and take advantage of Arizona’s favorable treatment of long-term gains.
Reduce Your Tax Burden
By using these strategies, you can reduce or avoid your capital gains tax in Arizona and keep more of your investment profits. Work with the team at Asset Preservation Wealth and Tax to develop a custom investment strategy to help you minimize your tax burden and prepare for financial success.
Get a free complimentary portfolio review today!
Tax loss harvesting is a strategy that may help minimize the amount of current taxes you have to pay on your investments by choosing to sell an investment at a loss. It is only appropriate for certain taxpayers in certain scenarios. Please review your retirement savings, tax, and legacy planning strategies with your legal/tax advisor before attempting a tax loss harvesting strategy.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.
