The subject of real estate taxes is probably the least enjoyable part of buying or selling a home. Yet, understanding your state’s real estate taxes, as a new homeowner or someone considering selling, is important. Buyers and sellers are impacted differently by tax regulations, so it’s crucial to know your responsibility for paying real estate taxes.
When preparing to buy or sell a home in Alabama, there are a few general tax guidelines you should understand, involving sellers’ tax responsibilities, real estate transfer taxes, how to calculate property taxes, and tax breaks and deductibles.
Use this Alabama real estate guide to help walk you through everything you need to know about real estate taxes as a new or existing homeowner.
Will You Have to Pay Taxes When You Sell Your Home in Alabama?
When selling your home, you generally pocket some amount of profit. Since the government often places taxes on capital gains, you might be curious about whether there’s a tax payment requirement on your Alabama home sale.
Luckily, most homeowners won’t ever have to part with the profit they receive on their home sale. That’s because the U.S. government only requires sellers to pay capital gains taxes on any profits earned through a home sale over the amount of $250,000. This profit is calculated after paying off any mortgage debt. In addition, married sellers who file joint tax returns only have to pay taxes on profits over the amount of $500,000.
The same logic is true at the state level in Alabama, making the tax process fairly painless for most Alabama sellers. This tax exclusion can also be claimed throughout the years on any primary residence, as long as the seller lived there for a minimum of two years and has not claimed this exclusion within the previous two year period.
How Much Are Real Estate Transfer Taxes in Alabama (and Who Pays Them)?
While capital gains tax likely won’t affect most Alabama sellers, real estate transfer taxes likely will. A real estate transfer tax is a tax charged whenever a real estate property transfers ownership. This tax can be owed on the state, county, and city level, depending on where the seller lives. While buyers sometimes pay these taxes as part of their contract, in most cases the seller is responsible for transfer tax fees.
Alabama has a set state rate for real estate transfer taxes, charging sellers $0.050 per every $500 of value in the property. County and city tax rates can vary depending on your home’s location, so it’s best to work with a local real estate agent to understand your specific tax payment requirements.
How to Calculate Property Taxes in Alabama
Property taxes are another financial expense both sellers and buyers should be aware of. These annual taxes are often calculated as a percentage of your home’s current market value. The money homeowners pay for their property taxes is often used to improve and maintain their local communities, funding schools, libraries, and fire stations.
Alabama is a state with some of the lowest property tax rates in the country, which is good news for current or potential homeowners. In fact, homeowners in Alabama only pay a quarter of the money in taxes than most other homeowners throughout the country pay.
The property tax rate in Alabama varies from county to county. For instance, in Birmingham (Jefferson County), the tax rate is 0.645%. If a home is valued at $250,000, the homeowner would be expected to pay $1,613 in property taxes for the year.
In Mobile (Mobile County), the tax rate is even lower at 0.546%. Homeowners with a home valued at $250,000 would only pay $1,365 in property taxes for the year. One of the most affordable cities to pay property taxes in would be Gulf Shores (Baldwin County) whose tax rate is only 0.350%. A homeowner with the same valued home as above would only pay $875 in yearly property taxes.
Tax Breaks for Alabama Home Buyers & Sellers
Another benefit of owning a home in Alabama are the tax breaks and deductions you often qualify for. Both sellers and buyers are eligible for a variety of credits and breaks, so it’s important to understand tax requirements for filing. Here are the tax breaks buyers and sellers should look into when preparing their taxes.
Tax Breaks and Credits for Buyers
When purchasing a home in Alabama, these tax deductions and credits can help you save money along the way.
Mortgage Credit Certificates
Mortgage credit certificates or MCCs allow buyers and homeowners to save more come tax season. While MCCs are most often granted to first-time home buyers, in Alabama they are available to any buyer with a fixed-rate FHA, VA, Rural Development, or private loan.
Mortgage credit rates in Alabama are as follows:
- 20% MCC for $150,001 loan or greater
- 30% MCC for $100,001 - $150,000 loan ($2,000 annual cap)
- 50% MCC for $100,000 loan or less ($2,000 annual cap)
Mortgage Interest Deductions
When buying a new home in Alabama, buyers should take advantage of mortgage interest deductions. To qualify in full and deduct the total amount of mortgage interest paid within a year, you must owe less than $750,000 on your loan.
Buyers who claim mortgage interest deductions will need to itemize their taxes and can only claim this deduction on their primary home and one other residential home each year.
Private Mortgage Insurance Deductions
If you paid less than 20% on your down payment, chances are you have to pay for monthly private mortgage insurance or PMI. The upside to paying PMI is that you’re able to deduct the full amount of interest you paid each year from your taxes.
To learn more, reach out to your accountant or real estate agent.
Property Tax Deductions
If you’ve paid your property taxes throughout the year, instead of in one large sum at the end of the year, you can likely deduct a portion of this amount from your taxes.
To take advantage of this deduction, you’ll need to itemize your taxes and ensure all property tax payments were made on time throughout the year. The cap for this deduction is $10,000, annually.
Tax Breaks and Write-Offs for Sellers
When preparing to sell your home in Alabama, it’s important to be aware of all the tax deductions and breaks you might be eligible to receive. Here are the top tax breaks you should be aware of.
Presale Repair and Improvement Write-Offs
Throughout the selling process, most sellers have to spend time and money on home repairs to restore their home back to its full value. These fixes could be small, such as replacing broken outlets, or larger in scope, such as replacing a non-functioning water heater. No matter the size, be sure to keep records of all repairs expenses.
Repairs can be claimed in full on your taxes, helping you save more money during tax season. However, it’s important to differentiate between repairs and improvements, since the IRS handles them differently.
Repairs refer to any maintenance or work done to help bring your home back to its original condition or home value. Improvements are enhancements or restorations done to improve your home’s value or update its aesthetic. In a nutshell, repairs are essential, but improvements are not.
Here are a few common examples of each:
- Replacing a burnt out light bulbs
- Repairing a leaky faucet
- Patching holes in drywall
- Adding wallpaper or shiplap
- Installing energy efficient toilets
- Redoing kitchen counters
While repairs can be deducted in full, improvements can only be partially deducted on your taxes and must follow a depreciation schedule. Your real estate agent can help you better understand the specific laws regarding improvements.
Mortgage Interest and Property Taxes Deductions
Even if you sold your home this year in Alabama, you’re still eligible to deduct your normal mortgage interest and property taxes for the selling year. You’ll follow the same rules as when you were a homeowner (must owe less than $750,000 on your loan and cap property tax deductions at $10,000).
Moving Cost Deductions
Military members in Alabama can help save money on taxes by deducting their moving expenses. If you’re an active military member who moved for your job, you’re allowed to deduct all of your moving expenses in full from your tax return.
There are so many laws and regulations around real estate taxes in Alabama that they can be tricky to fully understand. Working with a qualified accountant or seeking advice from your real estate agent can help you better prepare for the taxes you’ll owe and the deductions you’re eligible to claim.
If you’re considering selling your home in Alabama, maximize your tax incentives by working with a local Clever Partner Agent. Learn more here.
If you’re considering buying a home in Alabama, maximize your tax incentives by working with a local Partner Agent. Learn more here.