When you’re buying or selling a home in Alabama, the term “real estate transfer taxes” will likely come up during the closing process. Imposed by the state and/or local government, this tax is a fee paid as part of the closing costs that will transfer the home from the seller to the buyer.
But who pays this tax, how much is it, and can this tax be deducted from your annual income tax report?
Some states have no transfer tax, but Alabama isn’t one of them. This guide covers what buyers and sellers need to know about Alabama real estate transfer taxes so you can prepare your finances and avoid legal trouble.
Section I: Who Pays Transfer Taxes in Alabama: the Buyer or the Seller?
The real estate transfer tax is a tax paid to a local or state agency to transfer real property from one owner to another. The buyer cannot take ownership of the property until the transfer tax has been paid.
In Alabama, the transfer tax is usually paid for by the buyer. However, it’s common for the buyer to negotiate with the seller to pay some or all of this fee as part of the sales agreement.
In strong markets, sellers are in a better position to avoid paying the transfer tax because they can choose from multiple offers that give them the best financial outlook. In slow markets or in situations when a seller wants to sell their home quickly, they may have to agree to pay the transfer tax for the buyer because they don’t have much choice if they want to make the sale.
Section II: How Much Are Transfer Taxes in Alabama?
In Alabama, the real estate transfer tax rate is relatively lower than many other states, at a rate of $0.50 per $500 of the purchase price, or 0.1%. The transfer tax amount paid when your home sells will depend on how much your home sells for.
For example, the median home sale price in Alabama is $154,600, which means the real estate transfer tax amount would equal $155.00.
Section III: Can You Deduct Transfer Taxes?
Unlike property taxes, you cannot deduct real estate transfer taxes from your annual income taxes. However, the seller may be able to include this amount in the “cost basis” of the property.
When you sell your home for more than what you paid for it, you could be subjected to paying capital gains tax. Capital gain is calculated by subtracting the sale price from the price it cost you to acquire the property. For example, if you purchased a home for $150,000 and sell it for $200,000, your capital gain would be $50,000. The transfer tax when you sell your home would be $200, which would make your capital gain $49,800 instead.
Most home sales in Alabama will have no capital gains to claim. Individuals can exempt the first $250,000 in profit, while married couples filing jointly can deduct the first $500,000 of their profit. In most cases, you won’t need to worry about deductions in the first place. Only when your profit goes beyond this amount will you need to worry about deducting the transfer tax from your capital gains.
Section IV: Other Considerations
The good news for buyers and sellers is that neither party has to figure out real estate transfer taxes on their own. The closing attorney will calculate this amount for you and include it as part of the closing costs on the HUD-1 settlement form. The transfer tax must be paid at the time of the closing in order for the new homeowner to take possession.
If you are required to pay capital gains tax, this amount will be paid at tax time, not at the time of closing.
Buyers and sellers alike can benefit from partnering with an experienced local real estate agent who can help them navigate the complexities of the real estate transfer tax and other closing costs in Alabama.
Find a top-rated local agent near you to take the guesswork out of buying or selling your Alabama home.