Taxes on Selling a House in Alabama

Capital gains tax

You’ve probably heard the term “capital gains tax,” but what is it?

When you sell a “capital asset,” such as a piece of real estate, any profits the sale yields are considered capital gains. Capital assets most commonly include things like your home or vehicle but can also include stocks, bonds, or art.

A capital gains tax is a tax levied on any capital gains earned during a tax year. For example, if you purchased your Alabama home for $250,000 and sold it a few years later for $350,000, you have earned a capital gain of $100,000, which would be taxed.

Capital gains tax rates differ by state. Some states, like Florida, don’t even have a capital gains tax. In Alabama, the tax rate varies based on your income bracket, ranging between 2% and 5%, but for the purposes of selling a home, you will most often be taxed at 5%.

Capital gains are also classified as “short-term” or “long-term” at the Federal level.

• Capital gains are short-term when an asset is sold within a year of its purchase. Those gains are lumped into your regular income and taxed according to your tax bracket.
• Capital gains are long-term when they are earned from the sale of an asset after at least a full year of ownership. Those gains are taxed at a variable rate for a home sale, depending on your income. The table below will go into more detail:

2025 capital gains tax brackets

The table below shows the long-term capital gains rates for tax year 2025. The federal income tax has seven tax rates in 2025: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

It’s also possible to exclude your capital gains at the Federal level, assuming you qualify.

The maximum amount of capital gain that can be excluded is $250,000 for single filers and $500,000 for a married couple filing jointly.

According to the IRS Publication 523, you must meet these criteria:

• The home you’re selling is your primary residence.
• You’ve owned the home for at least two years in the five-year period before selling it.
• You’ve lived in the home for at least two years within the five-year period before selling it. The years you’ve lived in it don’t need to be consecutive. Specific exceptions to this rule are made for those who are disabled or those in the military, Foreign Service, intelligence community, or Peace Corps.
• You didn’t acquire the home through a like-kind exchange (also known as a section 1031 exchange) within the past five years. This is basically when you swap one investment property for another.
• You haven’t claimed the exclusion on another home in the past two years.
• You aren’t subject to expatriate tax (a government fee paid by those who renounce their citizenship or take up residency in another country).

You may still qualify for a partial exclusion, even if you don’t fit the above criteria.

A change in workplace location, a problem with your health, or having to sell the property of a parent who passed away, among others, can also qualify you. For more, please refer to IRS Publication 523.

How to report your Alabama capital gains taxes

• For your federal return, report your capital gains and losses using U.S. Individual Income Tax Return (IRS Form 1040) and Capital Gains and Losses, Schedule D (IRS Form 1040).
• Use form number Schedule D (Form 41 Only) for your Alabama capital gains.

Alabama transfer taxes

The government charges a tax on this transaction whenever you sell your home and transfer the legal ownership to the buyer. This is known as a transfer tax, sometimes called a Documentary Stamp Tax or recordation tax.

The Federal Trade Commission describes transfer taxes as fees that state or local governments impose when the title to a property transfers from one owner to another.

Transfer taxes will vary, as different states, counties, and cities have their own guidelines. Similar to other forms of taxation, these taxes are a way for the government to generate revenue and are a vital part of determining your overall profit when selling your home.

Who pays these taxes will vary depending on the state or municipality. Sometimes, it’s the buyer, sometimes the seller, and sometimes, in the case of Alabama, depending on the terms of the sales agreement, it can fall to either (or both.)

Alabama’s transfer tax is $.50 per $500 of value or fraction thereof. Two-thirds of this is funneled into the State General Fund, while the remaining third is allocated to the County where the transaction occurs.

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Property taxes owed

Property tax is a charge on real estate based on its assessed value, usually yearly. Like most tax-related charges, property taxes fluctuate depending on the state.

According to the Tax Foundation, Alabama’s effective property tax rate on owner-occupied housing value is typically 0.36%.

Alabama state taxes are paid by the calendar year, while local taxes are paid in arrears yearly (between October 1 and September 31).

Your taxes are prorated to the day of sale when you sell your home, meaning you only pay taxes for the days of the fiscal year that you owned your home.

The Alabama Department of Revenue can provide more information about taxes specific to your city or town here.

Selling an inherited home in Alabama

Depending on the state, you may owe taxes when selling an inherited home. Alabama, however, is not one of these states. However, you will still be responsible for property taxes on the house. It’s also possible that a lien might exist on the property if the previous owner was not up to date on their taxes, which you would be responsible for.

Other selling expenses you might encounter in Alabama

• Title fees: Title fees include a title search and title insurance. Title insurance protects the lender and the buyer of the property against any issues with a home’s title, such as forgeries, an undiscovered will, or deed restrictions, that could arise during a title search. Who pays the title insurance will vary —in Alabama, this typically falls to the seller.
• Settlement fees: These are usually 1% of the home sale value. The title company, escrow company, or attorney facilitating the transaction’s closing issues a lump sum (sometimes called escrow fees) to cover the costs involved in the final paperwork and the distribution of fees. For example, the title fees and who pays them vary, but they can be split between parties.
• Agent commissions: Historically, when a property changed hands, the seller paid a commission rate of 5%-6%, which was typically split between the listing agent and the buyer’s agent. A percentage of this was then given to the respective brokerages. However, in mid-2024, a settlement by The National Association of Realtors (NAR) changed how these fees are calculated. While these commission rates will vary, according to HomeLight’s 2024 Top Agent Insights report,  42% of agents say sellers still accept a traditional 3% listing agent commission. 33% express that sellers are requesting a 2.50% commission.

How to prepare for Alabama real estate taxes

Real estate taxes don’t need to be intimidating, and they don’t need to catch you off guard. There are several ways to get an idea of what you’ll owe before selling your home, and HomeLight is here to help. Here are some final steps to consider:

• Know your home’s value: Use an online Automated Valuation Model (AVM) tool like HomeLight’s free Home Value Estimator. A general idea of your home’s worth can help you calculate the potential capital gains from the sale.
• Save the correct documents: Before purchasing or selling a home, know what tax documents you need. Consult with your tax professional about the federal and state documents needed in Alabama and the tax breaks you might qualify for.
• Find a top agent: One of the most important steps is finding an experienced real estate agent who can guide you through the home sale process. A qualified agent can help you understand your tax burden and maximize your profits. Our data shows that the top 5% of real estate agents across the U.S. sell homes for 10% more than the average real estate agent.

HomeLight makes it easy to find top real estate agents in your market. From our agent match to innovative programs like Simple Sale and Buy Before You Sell, we have you covered when selling your home, ensuring every transaction is simple, certain, and satisfying.

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