Under IRC Sec. 121 if as of the date of sale you have owned and used a property as your principal residence for 24 out of the last 60 months, then you can exclude up to $250,000 of gain ($500,000 if married filing joint) if filing a single or MFS return.
So if you sell the property by 03/2007, then you will be able to use the full exclusion described above for both Federal and AZ and OR purposes. If you sell the property after 03/2007 (i.e. you will have owned and used the property as your principal residence for less then 2 out of five years) then you may not be able to use a partial exclusion normally available under the job change safe harbor exception described below. The reason for this is because in order to use the exception you have to show that the primary reason for the sale was the job change. The longer the property stays a rental the harder it will be to prove that the job change was the primary reason for the sale. You may qualify for another of the exceptions described below, but I recommend you sell prior to 03/2007 and make it a moot issue.
If you have owned or used your property as your principal residence for less then 24 months you may not use the Sec. 121 exclusion (i.e. $250K/$500K exclusion) unless you meet a qualified exception. You may use a pro-rata exclusion if the reason you are selling is related to a job change, for medical reasons or for some other unforeseen circumstance (i.e. death, disability, divorce, job loss, financial hardship, etc.). See below for a more expanded explanation of the allowable exceptions.
The pro-rata portion of the exclusion is calculated by dividing the number of days you both owned and occupied the property as your principal residence by 730 days (i.e. two years). Multiply the resulting percentage by $250K if single or $500K if MFJ.
If you do not meet one of the exceptions, then the gain is taxable. Also, if your gain is in excess of the available exclusion amount, then the excess gain is taxable. Since you have owned the property for more then one year, then the gain will be treated as a long-term capital gain taxed up to a maximum capital gain rate of 15% (5% if the gain would otherwise be taxable in the 10% and 15% brackets). You will also be subject to the depreciation recapture rules which require that all depreciation, whether taken or not (i.e. allowable) be recaptured as ordinary income subject to a maximum tax rate of 25%, regardless of the exclusion. Thus, you will have to recognize as ordinary income in the year of sale (subject to a max tax rate of 25%) the cumulative depreciation taken while the property was a rental.
Both OR and AZ has conformed to the Federal law described above. Accordingly, the manner in which your gain on the sale of your principal residence is treated for Federal purposes will also be the same for your AZ and OR state tax purposes as well. If you have taxable gain in excess of the available exclusion then OR will tax that excess gain, on the basis that the property is located in OR, at the applicable OR capital gains rate. AZ will also tax that excess gain because of your residency status, but will give you a credit for taxes paid to OR. In this situation you would file an OR non-resident tax return to report the excess gain.
Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.