1031 Exchanges and Capital Gains Taxes on the Gulf Coast
By Meredith Folger Amon, Licensed in Alabama and Florida
Guided by Integrity. Backed by Experience. Search the Gulf with Meredith Folger Amon.
Introduction: Why This Matters to Gulf Coast Investors
Over the years, I’ve worked with many investors along the Gulf Coast, and one of the biggest questions I get is: How do I minimize my tax liability when buying and selling property? The answer often comes down to one strategy — the 1031 tax deferred exchange.
If you’re investing in Orange Beach, Gulf Shores, Ono Island, or crossing into Florida markets like Destin, 30A, or Pensacola, understanding how capital gains taxes differ between Alabama and Florida can make a major impact on your bottom line.
Disclaimer
I am not a tax attorney, nor do I provide tax or legal advice. This article is for informational purposes only. Please consult with a qualified tax attorney or CPA regarding your individual situation. Neither I, Meredith Folger Amon, nor Bellator Real Estate LLC, are responsible for decisions made based on the information provided here.
What is a 1031 Exchange?
A 1031 exchange, named after Section 1031 of the IRS code, allows investors to sell one investment property and roll the proceeds into another “like-kind” property — deferring capital gains taxes in the process.
This means that instead of paying Uncle Sam after a sale, you keep your equity working for you in a new investment. On the Gulf Coast, where waterfront and vacation rental properties are always in demand, a 1031 exchange can be a powerful way to scale your portfolio.
How Capital Gains Taxes Differ in Alabama vs. Florida
Here’s the key distinction investors often overlook:
-
Alabama taxes capital gains at the state level (2–5%). Even when you defer taxes through a 1031 exchange, you’ll eventually recognize those gains and pay both federal and state tax when the property is sold without reinvestment.
-
Florida has no state income tax, meaning no state capital gains tax. Investors in Florida are only responsible for federal capital gains taxes.
That difference alone makes Florida extremely attractive to long-term investors. But remember, property taxes and transfer taxes in Florida are generally higher than in Alabama.
Federal Capital Gains Rules (Applies to Both States)
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Short-Term Gains (owned less than 1 year): taxed at your ordinary income tax rate (10%–37%).
-
Long-Term Gains (owned more than 1 year): taxed at 0%, 15%, or 20% depending on income level.
-
Primary Residence Exclusion: Homeowners may exclude up to $250,000 (single) or $500,000 (married filing jointly) in gains if they meet ownership and use requirements.
For investors, these numbers can add up quickly. That’s why a 1031 exchange is such an important tool — it defers both federal and (in Alabama) state liability when structured correctly.
Real-World Examples
I’ve created a chart comparing how a single homeowner, married couple, or investor might be taxed on a sale in Alabama vs. Florida.
|
Scenario |
Exclusion Applied |
Federal Tax (Est.) |
State Tax Impact |
|
Single homeowner (FL) - $300k gain on primary residence |
$250k exclusion → $50k taxable |
$7,500 (15% bracket) |
Florida: $0 (no state income tax) |
|
Married homeowners (FL) - $600k gain on primary residence |
$500k exclusion → $100k taxable |
$15,000 (15% bracket) |
Florida: $0 (no state income tax) |
|
Investor (FL) - $400k gain on rental property |
No exclusion → $400k taxable |
$60,000 (15% bracket, could be $80k+ at 20%) |
Florida: $0 (no state income tax) |
|
Single homeowner (AL) - $300k gain on primary residence |
$250k exclusion → $50k taxable |
$7,500 (15% bracket) |
Alabama: 2-5% on taxable portion (~$1k-$2.5k) |
|
Married homeowners (AL) - $600k gain on primary residence |
$500k exclusion → $100k taxable |
$15,000 (15% bracket) |
Alabama: 2-5% on taxable portion (~$2k-$5k) |
|
Investor (AL) - $400k gain on rental property |
No exclusion → $400k taxable |
$60,000 (15% bracket, could be $80k+ at 20%) |
Alabama: 2-5% on taxable portion (~$8k-$20k) |
This makes it clear: Florida’s lack of a state tax is a game-changer, but Alabama’s lower property taxes and strong rental demand also make it a compelling option. The right choice often depends on your long-term strategy.
Beyond Capital Gains: Property Taxes, Homestead Exemptions, and Transfer Fees
While capital gains tax is critical, other expenses also shape your return on investment. Property taxes, homestead exemptions, and transfer/recording fees differ between Alabama and Florida.
For investors, these differences can influence where and how you structure your purchases, especially when weighing long-term holds versus short-term repositioning strategies.
|
Feature |
Alabama |
Florida |
|
State Income Tax on Capital Gains |
Yes (2%–5% depending on income) |
No (no state income tax on capital gains) |
|
Average Effective Property Tax Rate |
~0.40% (one of the lowest in the U.S.) |
~0.80% (higher than Alabama) |
|
Homestead Exemption (Primary Residence) |
$4,000 (state) + $2,000 (county); does not apply to investment properties |
Up to $50,000; does not apply to investment properties |
|
Transfer / Recording Taxes |
Recording tax: $0.50 per $500 of value |
Documentary stamp tax on deeds (0.70% in most counties); mortgage doc stamp and intangible tax may also apply |
Why Local Expertise Matters
These transactions can get complicated quickly, especially when moving money across state lines or working with high-value waterfront properties. On the Alabama Gulf Coast, one of the most respected names in 1031 exchanges and real estate closings is Timothy D. Garner of Garner Law and Attorneys Title, Inc.
Attorneys Title, Inc. is a full-service title insurance and escrow closing company in Gulf Shores. Since 2001, they’ve closed thousands of commercial and residential transactions, from new construction and developments to refinances and 1031 exchanges. Their work is always attorney-supervised, underwritten by Old Republic National Title Insurance Company, and led by experienced closing manager Gail W. Cash.
Contact Information for Legal Guidance
Attorneys Title, Inc.
117 West 14th Ave
Gulf Shores, Alabama 36542
251-968-5540
https://attorneystitleinc.com/
Frequently Asked Questions About 1031 Exchanges
What is the purpose of a 1031 exchange?
It allows me to sell one investment property and reinvest the proceeds into another without immediately paying capital gains taxes, keeping my money working for me.
Can I exchange properties across Alabama and Florida?
Yes. As long as both properties are within the U.S. and are “like-kind,” you can sell in Alabama and buy in Florida (or vice versa).
How long do I have to complete a 1031 exchange?
45 days to identify replacement properties and 180 days to close.
Can I use my primary residence in a 1031 exchange?
No. A 1031 exchange only applies to investment or business properties.
Final Thoughts
As someone who lives and works on the Gulf Coast, I know how important it is to balance investment goals with smart tax strategies. Whether you’re buying a condo in Orange Beach, selling a home on Ono Island, or reinvesting in Florida’s 30A market, understanding capital gains tax and 1031 exchanges can save you significant money.
If you’re considering making a move, I’d be happy to connect you with trusted local legal experts like Tim Garner and his team at Attorneys Title, Inc. — and guide you to the right properties that align with your investment goals.
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