Alabama Capital Gains Tax on Real Estate

By Skyline Capital Investments · Updated October 26, 2026 · 7 min read

Does Alabama have a capital gains tax?

Alabama capital gains tax on real estate is the state individual income tax. There is no separate capital gains rate and no exclusion for long-term gains, so the gain on an apartment building is added to your other income and taxed at Alabama’s regular rates of 2%, 4% and 5%.

Because the 5% rate starts at just $3,000 of taxable income for a single filer and $6,000 on a joint return, almost every dollar of a sizable gain is taxed at 5%. What makes Alabama unusual is the deduction for federal income tax, covered below, which brings the effective rate on a large gain under 5%.

Alabama income tax rates for 2026

Alabama uses three rates with fixed dollar brackets, and the 2026 schedule is the one the Alabama Department of Revenue (ALDOR) publishes below. The top bracket starts so low that the brackets matter only for the first few thousand dollars of income.

• Capital gains, including gains from the sale of real estate, are reported on Schedule D and taxed with your other income.
• Nonresidents pay Alabama tax on gain from property located in Alabama and report it on Form 40NR.
• Alabama’s standard deduction is small and shrinks as income rises, bottoming out at $2,500 for single filers and $5,000 for joint filers, so it does little to offset a large gain.

The Alabama deduction for federal income tax

Alabama is one of the few states that lets individuals deduct federal income tax on the state return. Under ALDOR’s rule 810-3-15-.20, the deduction is the “Tax” amount on your federal return, as computed on federal taxable income, less credits such as the child tax credit. Alternative minimum tax counts and self-employment tax does not. ALDOR’s federal income tax deduction worksheet for 2025 also adds the 3.8% net investment income tax from federal Form 8960, so the example below includes it.

On a sale, the deduction works in your favor in a simple way. The federal tax you owe on the gain, often 19% to 29% of it once the net investment income tax is counted, is subtracted before Alabama applies its 5% rate. On a gain taxed federally at an average of about 25%, the Alabama rate on the gain falls to about 3.7%.

The deduction is figured on the federal return for the same tax year, using ALDOR’s federal income tax deduction worksheet. Part-year residents and nonresidents prorate it by the share of their income that is Alabama income.

How Alabama and federal capital gains tax stack

Federal and Alabama taxes are separate and add together, but in Alabama the federal bill also reduces the state bill. Federally, long-term gain is taxed at 0%, 15% or 20%. Revenue Procedure 2025-32 puts the start of the 20% bracket for 2026 at $613,700 of taxable income on a joint return and $545,500 for a single filer.

The portion of your gain equal to the depreciation you claimed is unrecaptured Section 1250 gain, taxed federally at up to 25%. The federal 3.8% net investment income tax applies once modified adjusted gross income passes $250,000 joint or $200,000 single. Alabama has no investment income surtax of its own.

Put together, the federal share of the tax on an Alabama apartment sale is usually six to seven times the state share. That shapes the planning: the reasons to use a 1031 exchange or an installment sale in Alabama are mostly federal.

Alabama withholding when a nonresident sells

When a nonresident sells Alabama real estate, the buyer must withhold Alabama income tax at closing under Ala. Code 40-18-86. ALDOR’s Form WNR instructions set the rate by the buyer’s tax type: 3% of the sales price when the buyer is an individual, and 4% when the buyer is a corporation, partnership or other entity. Many apartment buildings are bought by LLCs or other entities, so 4% is common on a multifamily sale.

If the seller signs an Affidavit of Seller’s Gain (Form NR-AF2), the buyer can apply the 3% or 4% rate to the gain instead of the price. Withholding can never exceed the seller’s net proceeds after the mortgage, commissions and other closing costs. The buyer files Form WNR and the WNR-V payment voucher by the last day of the month after the month of the sale.

• Alabama residents, including entities organized in Alabama or with their principal place of business there, are not subject to withholding.
• A nonresident can be a deemed resident on Form NR-AF1 only by meeting all four of ALDOR’s conditions, including filing Alabama returns for the two prior years.
• Sales with a purchase price under $300,000, IRC Section 121 principal residences, foreclosures and pass-through entities that file an Alabama composite return are exempt.
• If the seller is a single-member LLC disregarded for federal tax, the owner is treated as the seller, so the owner’s residence decides whether withholding applies.
• Withholding is a prepayment. The seller files an Alabama nonresident return, attaches Form WNR and gets back any excess.

Installment sales and Alabama withholding

Seller financing spreads the gain, and the withholding, over the years you collect principal. For a nonresident seller, ALDOR’s guidance bases the withholding at closing on the purchase price minus the installment note, or on the gain received at closing if the seller files Form NR-AF2. Each later principal payment is then subject to 3% or 4% withholding, or to that rate on the gain portion of the payment.

Interest on the note is not subject to this withholding unless the parties agree to it. Alabama still taxes the interest as income on your return. Since Alabama’s rate is effectively flat at 5% above a few thousand dollars of income, spreading the gain saves little Alabama tax by itself. The value of an installment sale in Alabama is mostly federal, where it can keep more of the gain out of the 20% bracket and below the NIIT threshold in a given year.

Depreciation recapture in Alabama

Alabama has no separate recapture rule or rate. All of the gain, including the part that comes from depreciation you claimed, is income taxed at up to 5%. The federal split between unrecaptured Section 1250 gain at 25% and long-term gain at 15% or 20% matters to Alabama only through the federal income tax deduction: the higher federal tax on the recapture portion produces a slightly larger Alabama deduction.

Keep your depreciation schedules with the property records. Your adjusted basis is what turns the sale price into gain, and an error there flows straight to both returns.

Worked example: selling a $2M apartment building in Alabama

A married couple living in Hoover sells a 24-unit building in Birmingham for $2,000,000 and pays $100,000 in selling costs. They bought it for $1,100,000 and have claimed $350,000 of straight-line depreciation, so their adjusted basis is $750,000 and their gain is $1,150,000: $350,000 of unrecaptured Section 1250 gain and $800,000 of long-term capital gain. They have $250,000 of other federal taxable income, and the building carries a $900,000 loan.

Federal tax: $87,500 on the Section 1250 gain at 25%, $2,055 on $13,700 at 15%, $157,260 on $786,300 at 20%, and $43,700 of net investment income tax, for $290,515.

Alabama tax: the federal tax on the gain, including the NIIT that ALDOR’s worksheet counts, is $290,515. Deducting it leaves $859,485 of the gain taxed at 5%, or $42,974, about 3.7% of the gain. Without the federal deduction, the Alabama tax would have been $57,500.

Combined tax is $333,489, about 29% of the gain. After paying off the loan, the couple nets $1,000,000 before tax and about $666,511 after.

The same sale by a nonresident seller

Now suppose the couple lives in Atlanta and owns the building in their own names, and the buyer is an LLC. The buyer withholds 4% of the $2,000,000 price, or $80,000, at closing. If the couple signs Form NR-AF2 stating their $1,150,000 gain, withholding drops to 4% of the gain, or $46,000. Their $1,000,000 of net proceeds does not limit either figure.

Their actual Alabama tax is figured on a Form 40NR, with the federal deduction and other deductions prorated by the share of their income that comes from Alabama, and will usually be less than $80,000. The excess comes back as a refund, but that money is tied up until the return is processed, so give the buyer the gain affidavit.

How a 1031 exchange changes the Alabama tax

A properly structured 1031 exchange defers the Alabama tax along with the federal tax. ALDOR’s withholding guidance states that a transfer where gain is realized but not recognized for Alabama income tax purposes, such as a like-kind exchange, is not subject to withholding, and that is because Alabama follows the federal nonrecognition rule.

In the example, buying a replacement of at least $1,900,000 and reinvesting all $1,000,000 of net cash would defer the full $333,489. Alabama has no clawback, so you can exchange a Huntsville or Mobile building for one in Tennessee or Florida without filing an annual state tracking form. Cash you keep is boot and is taxed by both governments. Our page on the 1031 exchange in Alabama covers the qualified intermediary agreement ALDOR requires for a nonresident’s deferred exchange.

The capital gains tax calculator and the 1031 exchange calculator run the federal side for your own figures.

Selling an Alabama apartment building

Skyline buys apartment buildings with five or more units in Alabama, from Birmingham and Huntsville to Montgomery, Mobile and Tuscaloosa. We buy directly, close on your timeline, and can work inside 1031 deadlines. If you live outside Alabama, we handle the Form WNR withholding at closing and can work from your gain affidavit.

For the carrying cost a buyer will underwrite, see our page on the property tax rate in Alabama. For notice, deposit and eviction rules, see Alabama landlord-tenant law for apartment owners.