Alabama taxes capital gains at 5%. Combined with federal taxes, your effective rate on a home sale could reach 23.8%.
AL State Rate
5%
Taxed as ordinary income
Federal Rate
15%
Most common long-term bracket
Combined Effective
23.8%
On $150K taxable gain (example)
After the $250K/$500K exclusion, here's what a typical seller might owe.
If Alabama is where your primary residence is located and you've lived there at least 2 of the last 5 years, you can exclude up to $250K (single) or $500K (married filing jointly) of your capital gain from both federal and state taxes.
Investment and rental properties in Alabama don't qualify for the exclusion. You'll owe 5% state tax plus federal tax on the full gain, plus 25% depreciation recapture on any depreciation claimed.
In Alabama, homes sold in February sell for 6% more than those sold in October (-7%). Timing your sale right can offset a significant portion of your tax bill.
Capital gains tax rates on home sales in Alabama and nearby states.
| State | Rate | Tax on $150K Gain | Notes |
|---|---|---|---|
| 0% | $0 | No state income tax | |
Florida0% | 0% | $0 | No state income tax |
| 4.7% | $7,050 | Flat tax (2026) | |
AlabamaYou | 5% | $7,500 | Taxed as ordinary income |
| 5.39% | $8,085 | Flat tax rate (2026) |
Selling in Tennessee instead of Alabama would save $7,500 in state tax on a $150K gain.
Alabama taxes capital gains as ordinary income, with a top marginal rate of 5%. While not the highest rate in the Southeast, it adds a meaningful layer of tax on top of your federal obligation when selling a home. Alabama does not offer a separate, lower capital gains rate, so all gains flow through the standard income brackets.
The state does provide some relief through its itemized deduction system. Alabama is one of the few states that allows a full deduction for federal income taxes paid, which can indirectly reduce your state tax burden. If you have a large federal capital gains bill, you may be able to deduct that amount from your Alabama taxable income in the following year.
For primary residence sellers, the federal $250K/$500K exclusion applies before Alabama calculates its share. Most homeowners who have owned and lived in their home for at least two of the last five years will see their gain partially or fully shielded. Investment property owners, however, face the full 5% on all gains plus potential depreciation recapture at the federal level.
Alabama also imposes local taxes in some counties, though these generally apply to earned income rather than investment income. Sellers should confirm their county-level obligations with a local CPA, particularly in Jefferson and Madison counties where local income taxes are in effect.
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