1031 Exchange & DST Investing in Alabama
Alabama conforms to federal Section 1031, so a properly structured real property exchange defers state as well as federal gain. Growing metros like Huntsville and Birmingham draw replacement capital, and DST interests are available to Alabama-based accredited investors nationwide.
State tax treatment of a 1031 exchange
Alabama uses federal adjusted gross income as the starting point for its individual income tax and conforms to the federal treatment of like-kind exchanges under Section 1031. When a taxpayer completes a valid exchange of real property held for investment or business use, the gain deferred for federal purposes is also deferred for Alabama purposes, with basis carrying over into the replacement property.
Alabama's top marginal individual income tax rate is 5%, which is the effective rate most investors face on long-term capital gains at the state level since Alabama does not provide a preferential capital gains rate. Deferral through a 1031 exchange therefore postpones that 5% state tax alongside the federal tax until a future taxable disposition.
Market snapshot
Alabama's investment real estate is concentrated in Huntsville, Birmingham, Montgomery, and the Gulf Coast around Mobile and Baldwin County. Huntsville's aerospace, defense, and technology base has driven some of the strongest population and job growth in the Southeast, supporting apartment, industrial, and build-to-rent demand.
Dominant asset classes include multifamily, industrial and logistics space, and coastal and single-family rentals. Relatively low entry prices and steady in-migration draw 1031 replacement capital from investors seeking yield and long-term appreciation without the pricing pressure of larger coastal markets.
Why 1031 & DST investors look here
- Alabama conforms to federal Section 1031, so a valid exchange defers both federal and 5% state tax on real property gains.
- Huntsville and the Gulf Coast offer growth-driven demand at lower price points than most coastal markets.
- No state-level nonresident real estate withholding simplifies closings for out-of-state sellers.
Replacement-property options
Alabama investors can complete a 1031 exchange into professionally managed Delaware Statutory Trust (DST) interests, exchange into a property and later contribute it to an UPREIT through a 721 exchange, or invest capital gains into Qualified Opportunity Zone funds. Replacement property does not need to be located in Alabama; a DST portfolio may hold assets across multiple states, letting investors diversify geography and asset type while still meeting the like-kind requirement.
Frequently asked questions
Does Alabama tax a 1031 exchange?
No, not at the time of a properly structured exchange. Alabama conforms to federal Section 1031, so gain deferred federally is also deferred for Alabama income tax until a later taxable sale.
Can I exchange Alabama property for out-of-state DSTs?
Yes. Replacement property in a 1031 exchange does not have to be in Alabama, and DST interests holding real estate in other states can qualify as like-kind replacement property.
Does Alabama withhold tax when a nonresident sells real estate?
Alabama does not impose a separate nonresident real estate withholding at closing, though nonresident sellers still report and reconcile any Alabama-source gain on a state return.
Gerald F. “Jerry” Baker, III — Founder & Managing Principal, Baker 1031 Investments · FINRA Series 22 / 63 · SIE. Read full bio →
State tax treatment is general and changes frequently; this page is educational and is not tax, legal, or investment advice. Confirm current state and local rules with your own CPA and attorney. Securities offered through Aurora Securities, member FINRA/SIPC. Real estate investments involve risk, including possible loss of principal.