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BILL # SB 1633 |
TITLE: income tax; subtraction; primary residence |
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SPONSOR: Mesnard |
STATUS: As Introduced |
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PREPARED BY: Benjamin Newcomb |
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The introduced version of SB 1633 would provide an individual income tax (IIT) subtraction for capital gains from the sale of a primary residence that the taxpayer has lived in for at least 5 years. Under current federal law, a taxpayer does not need to report the first $250,000 of capital gain, or $500,000 if married filing jointly, on the sale of their primary residence if they also meet the following 2 requirements: (1) has lived in the house for at least 2 out of the last 5 years, and (2) has owned the house for at least 2 out of the last 5 years. This means only gains exceeding the $250,000/$500,000 threshold are included in the taxpayer's federal adjusted gross income. The bill would become effective January 1, 2027.
Estimated Impact
We estimate the bill would reduce General Fund revenue by $(18.4) million annually, beginning in FY 2028. Due to the lack of detailed data on capital gains from real estate transactions, our estimate is speculative and should be interpreted with caution.
We have asked the Department of Revenue (DOR) for its perspective on the bill but have not yet received a response.
Our estimate assumes the following:
1) In DOR's most recent capital gains report, which is for TY 2023, the total amount of long-term capital gains (i.e., gains made on the sale of an asset held for more than one year) was $12.07 billion. Of this amount, $11.52 billion was for assets acquired after December 31, 2011 and $548.4 million was for assets acquired prior to that date.
2) Current law allows long-term capital gains on assets acquired after December 31, 2011 to be reduced by 25% for the purpose of calculating Arizona taxable income. Accounting for this reduction, there would be $9.19 billion [$11.52 billion x 75% + $548.4 million] in total taxable long-term capital gains.
3) According to the Internal Revenue Service's (IRS) Statistics of Income (SOI), capital gains from real estate transactions made up between 4% to 44% of total capital gains in the U.S. between 2004 and 2015, the most recent year for which data is available. After removing significant outliers, we estimate that on average 10% of net capital gains are generated from real estate transactions. Based on this percentage, we estimate that the total amount of long-term capital gains from real estate transactions is $919.2 million.
4) Since we do not have the data to determine how much of the $919.2 million in gain is derived from homes owned between 2 and 5 years (condition required for federal capital gains exemption but not the state exemption under SB 1633), as opposed to more than 5 years (condition required for the state exemption), our analysis assumes that 80% of the total gain would qualify for the capital gains exemption under the bill, or $735.4 million.
5) With an IIT rate of 2.5%, the General Fund revenue reduction would be $(18.4) million in FY 2028.
6) Urban Revenue Sharing Distributions to cities and towns would decrease by $(3.3) million annually, starting in FY 2030.
2/13/26