A 1031 exchange in Alabama lets you sell investment real estate and reinvest in like-kind property while deferring the tax on the gain. The federal rules apply the same way everywhere. Alabama adds a modest state tax on the gain and a nonresident withholding step at closing, and it pairs them with the lowest property taxes in the country, which supports replacement-property yields here. We act as your qualified intermediary, holding the proceeds and handling the documentation so the exchange holds from sale to closing.
Table of contents
- How much is capital gains tax on real estate in Alabama?
- Alabama's nonresident withholding
- Alabama 1031 exchange rules and timeline
- 1031 exchanges across Alabama markets
- Common Alabama 1031 exchange mistakes
- Start your Alabama 1031 exchange
- Frequently asked questions
How much is capital gains tax on real estate in Alabama?
Alabama taxes the gain as ordinary income, with a top rate of about 5%. That sits on top of the federal tax an exchange also defers:
- Long-term capital gains at 0%, 15%, or 20%, with the 20% rate applying above $545,500 of taxable income for single filers and $613,700 for married couples filing jointly in 2026.
- The 3.8% Net Investment Income Tax above $200,000 of modified adjusted gross income for single filers, $250,000 for married couples.
- Depreciation recapture, taxed as unrecaptured Section 1250 gain at up to 25%.
- Alabama's rate of up to about 5% on the gain.
Alabama conforms to Section 1031, so a properly structured exchange defers both the federal and the Alabama tax. The full federal framework is in our main 1031 exchange guide.
Alabama's nonresident withholding
When a nonresident sells Alabama real estate, the buyer withholds 3% of the sale price from an individual seller, or 4% from a business entity, under Code of Alabama Section 40-18-86. It is a prepayment against the Alabama tax, not an extra tax. In a 1031 exchange you claim an exemption through the nonresident seller affidavit and supporting documentation from your intermediary, so the withholding is not collected.
Alabama 1031 exchange rules and timeline
The federal deadlines govern, and they are strict:
- 45-day identification. Identify replacement property in writing within 45 days of the sale.
- 180-day closing. Close within 180 days of the sale, or by your return due date including extensions, whichever is earlier.
- No constructive receipt. Proceeds go to your qualified intermediary, never to you.
- Equal or greater value and debt. Reinvest all net proceeds and match or exceed the relinquished value and debt, or the shortfall is taxable boot.
- Same taxpayer. The entity that sold must be the entity that buys.
1031 exchanges across Alabama markets
Alabama's exchange activity spreads across several distinct markets. Birmingham, the largest, carries multifamily, commercial, and a substantial medical and university base. Huntsville has been one of the fastest-growing cities in the South, anchored by aerospace, defense, and technology, with a major federal arsenal and space-program presence driving demand for commercial, flex, and multifamily property. Mobile, on the Gulf, combines port and industrial activity, including a large aircraft manufacturing presence, with a growing logistics base. Montgomery, the capital, adds automotive manufacturing demand, and Gulf Shores carries beach, second-home, and short-term rental property. Alabama property tax is the lowest in the country, which is a real tailwind for replacement-property yields, though you should confirm the rate for any specific deal.
Common Alabama 1031 exchange mistakes
- Not filing the nonresident seller affidavit, so 3% or 4% of the sale price is withheld and tied up.
- Taking receipt of the proceeds, even briefly, which disqualifies the exchange.
- Missing the 45-day identification window.
- Trading down or pulling cash out, which creates taxable boot.
Start your Alabama 1031 exchange
Set up your exchange before your relinquished property closes, so the nonresident withholding is handled and the proceeds never reach your hands. Contact our team to begin, or to talk through a specific deal.
Frequently asked questions
How much is capital gains tax on real estate in Alabama?
Alabama taxes the gain as ordinary income at up to about 5%, on top of federal capital gains tax.
Is there nonresident withholding when I sell Alabama property?
Yes. The buyer withholds 3% of the sale price from an individual or 4% from an entity under Section 40-18-86. In a 1031 you claim an exemption through the nonresident seller affidavit.
Does Alabama conform to federal 1031 rules?
Yes. A properly structured exchange defers both the federal and the Alabama tax.
Do I need a qualified intermediary for an Alabama 1031 exchange?
Yes. The intermediary must hold the proceeds and facilitate the exchange. Engage one before the relinquished property closes.
This page is general information, not tax or legal advice. We act as a qualified intermediary and do not provide tax or legal advice. State and federal rules and thresholds change; confirm current figures with your tax advisor.
