1031 Exchange Rules in Alabama

Last reviewed: June 2026. State rules change. Verify current forms before closing.

What Is Different in Alabama

Alabama is a withholding state, but a manageable one. If you live outside Alabama and sell Alabama property for more than $300,000, the buyer must withhold state income tax at closing. A fully deferred 1031 exchange is exempt, and the exemption is claimed with a simple affidavit at the closing table. There is no advance application, no waiting period, and no ongoing reporting after the exchange. The details still matter, especially the special rule for deferred exchanges that puts a remittance duty on your qualified intermediary.

Does Alabama Conform to IRC Section 1031?

Yes. Alabama follows the federal like-kind exchange rules for real property. A 1031 exchange is an IRS-approved way to sell investment property and buy replacement property without paying tax on the gain right away. If your exchange qualifies for federal deferral, Alabama defers its income tax too. New to exchanges? Start with our 1031 exchange guide.

You can also exchange Alabama property for replacement property in any other state. Alabama imposes no requirement that the replacement property be located in Alabama, and it does not track deferred gain after you leave.

Alabama Tax Rate on Real Estate Gains

Alabama taxes capital gains as ordinary income at a top rate of 5% for 2026. On a $500,000 gain, that is roughly $25,000 of state tax on top of the federal bill. A qualifying exchange may defer all of it.

Nonresident Withholding at Closing

Under Alabama Code Section 40-18-86, buyers must withhold on sales by nonresident sellers when the price exceeds $300,000. The rates are 3% of the purchase price for individual sellers and 4% for entities such as corporations and partnerships. Withholding is capped at the net proceeds, so a thin closing cannot create an out-of-pocket bill.

On a $600,000 sale by a nonresident individual, that is $18,000 held back at closing unless an exemption applies.

How 1031 Exchangers Claim the Exemption: Form NR-AF3

A fully deferred like-kind exchange is exempt from Alabama withholding. The seller signs Form NR-AF3, the Seller's Certificate of Exemption, at or before closing. The buyer keeps the certificate in their records; it is not filed with the Alabama Department of Revenue.

Two wrinkles deserve attention:

• Partial exchanges. If you will recognize some gain, for example because you take cash boot, withholding applies only to the recognized gain. The seller documents this with Form NR-AF2, the affidavit of seller's gain, and the withholding is remitted with Form WNR and payment voucher WNR-V.
• Deferred exchanges and your QI. Alabama's deferred exchange exemption comes with a condition: the seller must agree that the qualified intermediary will file the payment voucher and remit withholding on any money still in the exchange account after the 180-day exchange period ends. In plain terms, if your exchange fails or leaves leftover cash, your QI sends Alabama its share. Make sure your QI understands this duty before closing. WealthBuilder 1031 prepares exchange documentation that supports the NR-AF3 certification and the QI remittance condition.

Withholding is not an extra tax. It is a prepayment credited on your Alabama return. But avoiding it at closing keeps your full equity working in the exchange, which matters when you need to buy replacement property of equal or greater value and offset any mortgage relief with new debt or additional cash.

No Claw-Back After You Exchange Out

Some states track deferred gain for years after an exchange. Alabama does not. Once your exchange completes, there is no annual Alabama filing tied to the deferred gain, even if your replacement property is in another state. The deferred gain simply carries over in your basis under the normal federal rules.

Federal Taxes Still Apply

An Alabama exchange defers two layers: federal and state. Here is what a taxable sale looks like without an exchange, using round numbers.

Example: $1,000,000 sale of an Alabama rental. Original purchase $600,000, with $100,000 of depreciation taken, so the adjusted basis is $500,000 and the total gain is $500,000.

Figures are illustrative and rounded. Your rates depend on income, filing status, and basis. Run your own numbers with our 1031 exchange calculators, then confirm them with your tax advisor.

Risks and Things That Go Wrong in Alabama Exchanges

• Missing the NR-AF3 at closing. If the certificate is not signed before funds disburse, the buyer must withhold. Recovering the money means waiting for a refund on your Alabama return.
• Boot surprises. Cash taken at closing or debt not offset can create recognized gain and trigger withholding on that gain.
• QI remittance failures. Alabama expects the QI to remit withholding on funds remaining after day 180 of a failed or partial exchange. A QI unfamiliar with Alabama's rule can leave you out of compliance.
• Failed deadlines. The federal 45-day identification and 180-day completion rules apply with no state extensions. See the IRS rules for 1031 exchanges.
• Deferral is not elimination. Alabama and the IRS will tax the deferred gain when you eventually cash out. Plan the exit, not just the exchange.

Alabama 1031 Exchange FAQs

Does Alabama withhold on my sale if I do a 1031 exchange?
Not if the exchange is fully deferred and you sign Form NR-AF3 at closing. If you recognize any gain, withholding applies to the recognized portion.

What is the $300,000 threshold?
Alabama withholding only applies to nonresident sales where the purchase price exceeds $300,000. Sales at or below that amount are outside the withholding rules entirely.

Can I buy my replacement property outside Alabama?
Yes. Alabama has no in-state replacement requirement and no annual tracking of deferred gain after you exchange out of the state.

What happens if my exchange fails after closing?
Your qualified intermediary must remit Alabama withholding on the funds remaining after the 180-day exchange period, and you would recognize the gain federally.

Is the withholding an extra tax?
No. It is a prepayment of Alabama income tax, credited when you file your Alabama return.

Sources

• Ala. Code Section 40-18-86
• Alabama Department of Revenue, Withholding Requirements for Sales or Transfers of Real Property by Nonresidents (updated Sept. 22, 2025)
• Tax Foundation, State Individual Income Tax Rates and Brackets, 2026

Want to learn more?

Our 1031 exchange guide covers the full process from sale to replacement. Ready to start an Alabama exchange? WealthBuilder 1031 is attorney-owned, serves all 50 states, and charges a flat $1,000 fee. Start at WealthBuilder1031.com or call 888-508-1901.

This page does not constitute legal or tax advice. Consult your attorney and tax advisor about your specific situation.

Ready to start your Alabama 1031 exchange? WealthBuilder 1031 acts as your qualified intermediary for a flat $1,000 fee, $750 at your sale and $250 at your purchase. See our Alabama 1031 exchange services to get started.