Capital gains tax in Alabama (2026): selling a business, real estate or farm

The federal tax deduction: Alabama's quiet discount on a big sale

Alabama is one of the few states that lets individuals subtract the federal income tax they owe. The 2025 Form 40 worksheet starts with federal income tax, adds the 3.8% Net Investment Income Tax from Form 8960, and subtracts certain refundable credits; the result is deducted on the Alabama return (2025 Form 40 instructions, page 31). In a sale year the federal bill is large, so the deduction is large too, and it lands in the same year as the gain.

The practical effect: each dollar of federal tax the sale creates shrinks Alabama taxable income by a dollar, which removes 5% of that dollar from the Alabama bill (ALDOR rate FAQ, 2026). The engine examples below leave that deduction out on purpose, so treat their Alabama line as a ceiling. Federal tax still runs 0%, 15% or 20% on long-term gain for 2026 under Rev. Proc. 2025-32; the federal capital gains guide covers that side.

Worked numbers: stock, a move, and a rental

A joint-filing couple with $150,000 of other income sells company stock for a $2,000,000 long-term gain in 2026. As Alabama residents the sale adds $100,000 of state tax before the federal deduction, and $571,065 in total, an effective 28.6%. If they had truly moved to Florida before signing, the same sale costs $471,065; the gap of $100,000 is the Alabama layer at its maximum.

Real estate behaves differently. An Alabama rental building with $500,000 of unrecaptured Section 1250 gain costs $610,353 federal plus state for a resident, and a move does not help: a nonresident still owes Alabama on Alabama real property, which is why the withholding rules below exist. For the move-first plan and its domicile tests, see changing residency before a sale.

Seller financing: recapture can follow the payments in Alabama

Federally, Section 453(i) forces all depreciation recapture into the year of sale even when the buyer pays over ten years. Alabama's instructions say installment income is reported under Section 453 "with the exception of 453(i)" (2025 Form 40 instructions, Line 5). For an equipment-heavy business or a building with years of depreciation, that means the Alabama share of recapture is not front-loaded the way the federal share is, so the state return and the federal return will show different gain each year. Keep a separate Alabama installment schedule.

Federal rules for the note itself, such as the interest rate floor and pledging limits, are covered in the installment sale analysis and recapture on an installment sale.

Selling Alabama property as a nonresident: Section 40-18-86

When the seller is not an Alabama resident, the buyer must withhold at closing: 3% of the purchase price if the buyer is an individual, 4% if the buyer is an entity, capped at net proceeds. If the seller signs Form NR-AF2 swearing to the gain, the same percentage applies to the gain instead. The rule does not apply below a $300,000 price or to a Section 121 principal residence (ALDOR nonresident withholding package, revised September 22, 2025).

• Installment sales (2025 package): withholding on the down payment equals price less the note, then 3% or 4% of the principal in each later payment.
• Note interest: ALDOR treats interest on a note from Alabama investment or rental real estate as Alabama income to the nonresident, but it is not subject to withholding unless both sides agree. Many states let interest follow the seller home; Alabama does not.
• Deemed resident: a nonresident who filed Alabama returns for the prior two years, keeps doing business or keeps enough Alabama real estate in the state, and will report the sale can avoid withholding with Form NR-AF1.

Conformity details that change the Alabama gain

• No passive loss limit. Alabama has no provision like the federal passive activity rules (2025 Form 40 instructions), so rental losses were generally used as they occurred. A sale that frees suspended federal losses under IRC 469 usually frees nothing extra on the Alabama return.
• Depreciation. Alabama allows Section 179 expensing for years after 1989 and treats MACRS as a reasonable allowance (2025 Form 40 instructions); assets placed in service before 1990 may carry a different Alabama basis.
• Home sales. Gain on a personal residence is taxable to the same extent as on the federal return, so the Section 121 exclusion carries over, and a loss is not deductible.
• Bullion. Since January 1, 2025, net gain on exchanges of precious metal bullion is excluded (Act 2024-0447).

Closing costs and the estate side

Alabama's deed tax is 50 cents per $500 of value, or $1 per $1,000 (Code of Alabama 40-22-1), modest next to the 4% to 5.95% big-city transfer taxes elsewhere. Who pays is set by the contract. For older owners, the federal step-up in basis at death under IRC 1014 removes the built-in gain for heirs and therefore the Alabama tax on it too. Compare Alabama with its neighbors on the capital gains tax by state table, including Tennessee and Florida. To weigh a cash sale, a note, a 1031 and a move together, get the Big Sale Tax Analysis.

Run your own numbers

Frequently asked questions