Rental Property Taxes in Alabama (2026 Guide)

1. Property Tax: the 10%-vs-20% Trap

This is the single most important Alabama landlord fact. Alabama taxes property on an assessment ratio — a percentage of fair market value — set by the property’s class (AL Code 40-8-1), and rentals get a far worse class than owner-occupied homes:

• Class III — 10%: single-family, owner-occupied residential property (plus agricultural and forest land).
• Class II — 20%: “all property not otherwise classified.” A non-owner-occupied residential rental falls here, at double the owner-occupied taxable base for an identical home.

2. Income Tax (Up to 5%)

Alabama has a graduated individual income tax of 2% / 4% / 5% (AL Code 40-18-5). The top 5% rate is reached at a low threshold — taxable income over $6,000 for a single filer — so most landlords’ net rental income is taxed at the 5% top rate. SheltrIQ’s engine computes the exact liability from your filing status and income.

3. Capital Gains (Taxed as Ordinary Income)

Alabama has no preferential capital-gains rate. A gain on the sale of a rental — short- or long-term — is folded into ordinary income and taxed under the same graduated 2%/4%/5% schedule (AL Code 40-18-5), so the top state rate on a disposition gain is 5%. Plan your sale year knowing the gain lands on top of your other income with no separate, lower bracket.

4. Bonus Depreciation (Full Conformity)

Good news for Alabama landlords: Alabama uses rolling conformity to the Internal Revenue Code — it defines the IRC “as in effect from time to time” (AL Code 40-18-1.1) — and therefore conforms to federal bonus depreciation under §168(k). There is no Alabama add-back: the bonus depreciation you take federally carries straight through to your Alabama return, so your state and federal depreciation basis stay aligned.

5. Recording Taxes (Deed + Mortgage)

Alabama’s transfer tax comes in two parts, both paid at recording:

• Deed recording tax — $0.50 per $500 of value (0.10%) on the conveyance (AL Code 40-22-1).
• Mortgage recording tax — $0.15 per $100 of indebtedness (0.15%) when you record a mortgage or deed of trust (AL Code 40-22-2).

Both are low by national standards, but a financed purchase pays both — budget for the deed tax on the price and the mortgage tax on the loan amount.

6. LLC Fees & the $0 Business Privilege Tax

Alabama eliminated the LLC annual report effective January 1, 2024 — LLCs no longer file the Secretary of State annual report (only for-profit corporations still do). LLCs do remain subject to the Business Privilege Tax (BPT) (AL Code 40-14A), but a 2024 change is decisive for small landlords:

The one-time cost is formation: the Alabama Secretary of State Certificate of Formation filing fee is $200 (plus a separate county probate recording fee). A brand-new LLC technically files an initial BPT return (Form BPT-IN) within 2.5 months of formation, but under the same $100-or-less exemption a small LLC owes nothing.

7. Rent Control

Alabama prohibits local rent control statewide (AL Code 11-80-8.1) — no county, city, or town may enact, maintain, or enforce any ordinance controlling the amount of rent charged for private rental property. You set rents at market.

8. Security Deposit Rules

• Cap of one month’s rent on the security deposit (AL Code 35-9A-201) — but a pet deposit, a deposit for tenant-requested alterations, and a deposit for activities that raise your liability/insurance risk are excluded from that one-month cap.
• Return within 60 days of the tenancy ending and you regaining possession, with a written itemized statement of any deductions — Alabama’s 60-day window is unusually long compared with most states’ 14–30 days, so calendar it.

9. How SheltrIQ Helps Alabama Landlords

Alabama’s rules reward landlords who model the details — SheltrIQ keeps your return on the current rules:

• Graduated income modeling — applies Alabama’s 2%/4%/5% schedule (AL Code 40-18-5) to your net rental income for an exact state liability, not a flat estimate.
• Full bonus-depreciation conformity — carries your federal §168(k) bonus depreciation straight through, with no Alabama add-back to track.
• Disposition modeling — treats a sale gain as ordinary income taxed up to 5%, so your projected state tax on a sale is right.
• AI Schedule E classification — sorts each expense to the correct line so your Alabama income starts from an accurate federal return.