Real Estate Tax Calc
Arkansas income tax on rental income
Arkansas imposes a personal income tax on all net rental income earned by residents and on income from Arkansas-source property earned by nonresidents. Arkansas income tax rates have been reduced substantially in recent years. For 2024, the top marginal rate is 4.4% and applies to income above $90,600 for married filers. Lower brackets apply at 2% and 3.9% at lower income levels. (Rates should be verified on the Arkansas Department of Finance and Administration website for the current tax year, as Arkansas has been actively reducing rates.)
Net rental income — gross rents minus all allowable deductions including mortgage interest, property taxes, insurance, repairs, management fees, and depreciation — is what flows to the Arkansas income tax return. The same Schedule E calculation used for federal purposes generally applies at the state level, with adjustments for items where Arkansas does not conform to federal law (primarily depreciation). The net result is that Arkansas rental investors face a modest state tax obligation on profitable rentals, but the low rate is far more favorable than high-income-tax states.
For out-of-state investors owning Arkansas rental property, Arkansas requires filing an Arkansas nonresident income tax return. Rental income sourced from Arkansas property is taxable to Arkansas regardless of where the owner resides. The investor's home state may also tax the income but typically provides a credit for taxes paid to Arkansas, avoiding double taxation under most state tax systems.
Arkansas property tax structure and how Sebastian County assesses property
Arkansas has one of the lowest effective property tax burdens among U.S. states. The Arkansas constitutional assessment framework requires counties to assess real property at 20% of its true market value. This means a property with a market value of $130,000 carries an assessed value of only $26,000 for property tax purposes. Millage rates are then applied to this assessed value rather than to the full market value — substantially reducing the effective property tax rate compared to states that tax at full market value.
The Sebastian County Assessor is responsible for determining market values and maintaining the county's assessment rolls. The Sebastian County Tax Collector collects property taxes from both the county and all overlapping taxing units — the city of Fort Smith, school districts, and any special improvement districts. The combined millage rate varies by location within the county, but Fort Smith's low assessment ratio means the effective rate expressed as a percentage of market value is typically in the 0.5% to 0.7% range — significantly below the national average of approximately 1.0% to 1.1%.
Federal depreciation for Fort Smith rental property
Federal depreciation rules apply uniformly regardless of which state a rental is located in. A Fort Smith residential rental — single-family, duplex, small apartment building — is 27.5-year MACRS straight-line property under IRC §168(c). A commercial or mixed-use building uses the 39-year recovery period. Depreciation begins in the month the property is placed in service (available for rent), using the mid-month convention.
The depreciable basis for federal purposes is the building component of the purchase price plus eligible closing costs — title fees, recording fees, survey costs, and attorney fees for the acquisition — allocated to the building rather than land. Use the Sebastian County Assessor's land-to-improvement ratio or an independent appraisal to make this allocation. Land is not depreciable at any recovery period.
For a Fort Smith single-family rental, a cost segregation study may be economically justified if the acquisition cost is large enough to make the study fee worthwhile. Typical thresholds are $300,000 or more in depreciable basis. At lower acquisition costs more common in Fort Smith's market, the study cost may exceed the present value of accelerated deductions. Run the numbers before ordering a study.
Arkansas bonus depreciation addback
Arkansas does not conform to federal bonus depreciation under IRC §168(k). This is the same nonconformity that California and a number of other states apply. If you claim federal bonus depreciation on qualifying personal property in a Fort Smith rental — for example, appliances, certain fixtures, and other 5-year MACRS property identified in a cost segregation study — you must add that bonus depreciation back on your Arkansas income tax return and compute Arkansas depreciation on a straight-line basis instead.
The practical effect: suppose you place $20,000 of 5-year personal property in service in a Fort Smith rental in 2026 and claim 40% federal bonus depreciation of $8,000. Your Arkansas return requires an $8,000 addback, then allows $20,000 ÷ 5 years = $4,000 of Arkansas straight-line depreciation in year one. The net Arkansas addback is $4,000 ($8,000 federal bonus minus $4,000 Arkansas year-one straight-line). At Arkansas's 4.4% top rate, this $4,000 difference generates approximately $176 of additional Arkansas tax in year one — a small number given Fort Smith's low acquisition prices and the modest Arkansas rates. The difference reverses over the 5-year schedule as the Arkansas straight-line catches up.
Arkansas also has its own Section 179 dollar limits that may differ from federal. Verify the current Arkansas Section 179 limits on the Arkansas DFA website for the year you are filing.
Arkansas capital gains 50% exclusion — impact on rental property sales
One of Arkansas's most distinctive and investor-favorable tax provisions is the 50% exclusion of net capital gains on assets held more than one year, codified at A.C.A. §26-51-433. This means that when you sell a Fort Smith rental property after holding it for more than a year, only 50% of the net long-term capital gain is subject to Arkansas income tax. The excluded 50% is simply not taxed at the state level.
At Arkansas's 4.4% top rate applied to 50% of the gain, the effective Arkansas capital gains tax rate is 2.2% on long-term gains — well below what California investors face (up to 13.3% on the full gain). For federal purposes, the full gain is taxable at 0%, 15%, or 20% for the capital gain component, and up to 25% for unrecaptured Section 1250 depreciation recapture — the Arkansas exclusion does not affect the federal side of the calculation.
There is an open question — best resolved with a qualified Arkansas tax professional — regarding the treatment of unrecaptured Section 1250 gain (depreciation recapture) under the Arkansas capital gains exclusion. Federal law taxes this portion as ordinary income capped at 25%, while characterizing it separately from the §1231 capital gain. The interaction with Arkansas's long-term capital gain exclusion under A.C.A. §26-51-433 should be carefully analyzed before you close a sale.
Worked example: $130,000 Fort Smith duplex
Consider a $130,000 purchase of a Fort Smith duplex. The Sebastian County Assessor's records show a land value of $20,000 (approximately 15%), leaving a building value of $110,000. Add $5,000 of building-allocable closing costs for a total depreciable basis of $115,000. The property is residential rental property and depreciates over 27.5 years.
Annual depreciation (federal): $115,000 ÷ 27.5 years = approximately $4,182 per year.
Annual depreciation (Arkansas): Assuming no bonus depreciation is claimed, Arkansas depreciation is the same $4,182 straight-line. If bonus depreciation is claimed on a small amount of personal property, the addback calculation follows the example in the section above.
Annual property tax: The Sebastian County assessed value is $130,000 × 20% = $26,000. At a combined millage rate of 60 mills (0.060), the annual property tax is $26,000 × 0.060 = $1,560. This is deductible in full on Schedule E for both federal and Arkansas purposes as a rental expense.
Tax on net rental income: Suppose both units are rented and gross rents total $18,000 per year. After vacancy ($900 at 5%), property taxes ($1,560), insurance ($1,200), maintenance and repairs ($2,000), and management ($1,440), operating income before depreciation is approximately $10,900. Subtract federal depreciation of $4,182 for federal taxable income of approximately $6,718. Federal tax at 22% = approximately $1,478. Arkansas tax at 4.4% on the same $6,718 (assuming no addback) = approximately $296. Combined federal-and-state tax is approximately $1,774, or under 10% of gross rents — a tax-efficient outcome compared to high-rate states.
Sale after 10 years: Suppose you sell for $180,000 after 10 years. Accumulated depreciation is approximately $41,820 (10 × $4,182). Adjusted basis is $130,000 + $5,000 − $41,820 = $93,180. Gain is $180,000 − $93,180 = $86,820. Federal depreciation recapture (unrecaptured §1250 gain) is $41,820 at a federal maximum rate of 25%. The remaining §1231 gain of $45,000 is taxed at the applicable long-term capital gains rate. Arkansas tax on the capital gain portion: $45,000 × 50% = $22,500 subject to Arkansas income tax at 4.4% = approximately $990. The depreciation recapture treatment at the Arkansas level should be confirmed with a tax professional.
Passive activity loss rules for Arkansas rentals
Arkansas follows federal passive activity loss rules under IRC §469. Rental activities are passive by default, and losses exceeding rental income generally cannot be deducted against other income in the current year unless you qualify for the $25,000 rental loss allowance (AGI below $150,000 and active participation) or qualify as a real estate professional under IRC §469(c)(7).
For a Fort Smith rental at these acquisition cost levels, the property is more likely to generate modest positive taxable income than a large loss — because the low purchase price means relatively modest depreciation, and the low property taxes and insurance keep expenses down. The passive activity rules are less likely to be a binding constraint here than in markets with higher acquisition costs and larger depreciation deductions relative to rents. That said, in early years when a duplex may need significant repairs, expenses can temporarily exceed income, and understanding the passive loss rules before that year occurs is worth the preparation.
Building a Fort Smith rental portfolio and long-term tax planning
Fort Smith's combination of low acquisition prices, low property taxes, modest Arkansas income taxes, and the 50% capital gains exclusion creates a favorable environment for building a rental portfolio from a tax perspective. The key planning considerations over a multi-unit portfolio include: (1) tracking suspended passive losses on a property-by-property basis and understanding they are released at sale; (2) managing the Arkansas bonus depreciation addback when conducting cost segregation; and (3) modeling the 50% Arkansas capital gains exclusion into exit analyses to see the true after-tax proceeds from a sale.
Investors who hold multiple Fort Smith properties can use losses from higher-expense properties in a given year to offset income from stabilized properties, as long as the properties are not grouped in a way that violates the passive activity grouping rules. Consulting a CPA familiar with Arkansas rental taxation is particularly valuable for portfolio holders planning to sell multiple properties in a single year, since the interaction of depreciation recapture, the 50% exclusion, and the federal capital gains rates creates planning opportunities that are easy to miss without professional guidance.
Frequently asked questions
What is the property tax rate in Fort Smith, AR?
Sebastian County property tax rates vary by taxing district. Arkansas assesses real property at 20% of appraised value, so a $130,000 property has a $26,000 assessed value. At a combined millage rate of roughly 55 to 65 mills, the annual tax on a $130,000 property runs approximately $1,430 to $1,690. Consult the Sebastian County Assessor for the current millage rates applicable to a specific parcel.
Does Arkansas tax rental income?
Yes, Arkansas taxes net rental income as ordinary income. Arkansas income tax rates range from 2% to 4.4% for 2024, with the top rate applying above $90,600 of taxable income for married filers. Arkansas has been reducing its rates in recent years — check the Arkansas DFA website for current rates before filing.
What is the Arkansas capital gains exclusion for real property?
Arkansas allows a 50% exclusion of net capital gains from assets held more than one year under A.C.A. §26-51-433. This means only 50% of a long-term capital gain is subject to Arkansas income tax, resulting in an effective Arkansas capital gains rate of approximately 2.2% at the 4.4% top bracket. This is a significant state-level advantage for rental investors at exit compared to states that tax the full gain.
Are depreciation recapture rules the same in Arkansas as federal?
Federal depreciation recapture under IRC §1250 taxes unrecaptured depreciation at a maximum federal rate of 25%. Arkansas generally follows the federal character of gain, but the 50% capital gains exclusion under A.C.A. §26-51-433 may interact differently with the recapture component. Consult a tax professional for the state-level recapture treatment on a specific sale.
Is a 1031 exchange allowed in Arkansas?
Yes. Federal 1031 exchange rules under IRC §1031 apply in Arkansas, and Arkansas conforms to the deferral of gain on a qualifying like-kind exchange. Both the federal capital gain and the Arkansas income tax are deferred. Unlike California, Arkansas does not have a clawback rule for exchanges into out-of-state replacement property.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.