Best Estate Tax Guide for Surviving Spouses Selling Inherited Property in Alabama

If you co-owned your house with your spouse in Alabama and are now considering selling it after their death, there is a tax trap that no one mentions until you are sitting across from a CPA watching them calculate a five-figure capital gains bill you did not expect. Alabama is a common law state. That means only the deceased spouse's 50% ownership interest in jointly held property receives a step-up in basis to fair market value at the date of death. Your 50% --- the half you have owned since you bought the house together --- keeps its original cost basis. If you purchased the house for $120,000 twenty years ago and it is worth $320,000 today, you do not get a full step-up to $320,000. You get a step-up on half: the deceased spouse's share moves from $60,000 to $160,000. Your share stays at $60,000. Your combined basis is $220,000. If you sell for $320,000, you owe capital gains taxes on $100,000 --- not zero.

That $100,000 gain is taxed twice: once by the IRS at federal capital gains rates (0%, 15%, or 20% depending on your income), and again by Alabama, which taxes capital gains as ordinary income at rates up to 5%. The combined tax bill on a $100,000 gain can reach $20,000 for a surviving spouse in a moderate income bracket. Families who assumed the entire property stepped up to current market value --- because that is how it works in community property states like California, Texas, and Washington --- discover this only after listing the house. By then, the sale is in progress, the closing date is set, and the CPA is explaining that you owe $15,000 to $20,000 that you never budgeted for.

The Alabama Final Tax & Estate Tax Guide is the single resource that covers the full picture: the 50% step-up rule, the date-of-death appraisal requirement, the Alabama property tax arrears system and its December 31 penalty, the HB73 assessment cap and what happens when the house changes hands, the homestead exemption transfer, and the capital gains calculation. It includes a Step-Up in Basis Worksheet and a Property Tax Reference Card as standalone printable tools specifically designed for surviving spouses selling inherited property.

The 50% Step-Up Rule in Common Law States

The step-up in basis is the single largest tax benefit available to surviving spouses and beneficiaries. When someone dies, the IRS resets the cost basis of inherited assets to fair market value at the date of death. This eliminates unrealized capital gains that accumulated during the deceased's lifetime. For many families, the step-up converts what would have been a $50,000 or $100,000 taxable gain into zero.

But the step-up only applies to the portion of the asset that the deceased actually owned. In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), both spouses are deemed to own 100% of community property together. When one spouse dies, the entire property --- both halves --- receives the step-up. A house purchased for $150,000 that is worth $400,000 at death gets a full $400,000 basis. Sell it the next day, owe nothing.

Alabama is not a community property state. Alabama is a common law state. Under common law, each spouse owns their own half of jointly held property as a separate interest. When one spouse dies, only their half steps up. The surviving spouse's half retains its original purchase basis.

This distinction matters enormously when the property has appreciated significantly. A house purchased 25 years ago in Hoover or Mountain Brook for $140,000 that is now worth $380,000 produces a dramatically different tax result depending on which state's ownership rules apply:

• Community property state: Full step-up to $380,000. Sell for $380,000. Capital gains: $0.
• Alabama (common law state): Half step-up. Deceased spouse's half: $70,000 becomes $190,000. Surviving spouse's half: stays at $70,000. Combined basis: $260,000. Sell for $380,000. Capital gains: $120,000.

That $120,000 gain is real income that the IRS and the Alabama Department of Revenue both expect you to report. The federal capital gains exclusion for a primary residence ($250,000 for a single filer) will shelter most of it at the federal level --- but Alabama taxes capital gains as ordinary income with no separate exclusion. At Alabama's top rate of 5%, that is $6,000 in state taxes alone, on a gain the surviving spouse assumed would be zero.

Why Date-of-Death Appraisals Are Non-Negotiable

The step-up only works if you can prove the fair market value of the property on the exact date of death. Not the Zillow estimate. Not the county assessed value. Not the price the house sells for six months later. The IRS requires a defensible fair market value appraisal as of the date of death --- or, if the executor elects the alternate valuation date, exactly six months after death.

For surviving spouses who plan to sell, the date-of-death appraisal serves two purposes. First, it establishes the deceased spouse's stepped-up basis, which directly determines your capital gains tax. Second, it creates an audit-defensible record. If you sell the house two years later at a significant gain and the IRS questions the basis, the appraisal is your evidence. Without it, you are arguing the value of a property at a point in time with no professional documentation.

A residential appraisal in Alabama costs $350 to $500. The tax savings from an accurate, defensible step-up can be $5,000 to $20,000. Skipping the appraisal to save $400 is the most expensive shortcut in estate tax administration.

Order the appraisal as soon as possible after the death. The closer the appraisal date is to the actual date of death, the harder it is for anyone --- the IRS, a co-beneficiary, a creditor --- to argue the value is wrong. Waiting six months and then asking an appraiser to reconstruct the value retroactively is possible but weaker.

Alabama Property Tax: The Arrears System and the December 31 Penalty

Alabama property taxes operate on an October 1 to September 30 fiscal year, paid one year in arrears. The tax bill you receive in October 2026 covers the fiscal year that ended in September 2026. This means the deceased may owe property taxes for a period they were alive but that have not yet been billed. And it means the surviving spouse inherits an obligation that does not appear on any current bill.

The critical deadline: December 31. Alabama law requires the property owner (or the executor, or the surviving spouse who now holds title) to notify the County Revenue Commissioner of any change in ownership by December 31 of the year the change occurs. If the death happened in March 2026, you must notify the county by December 31, 2026. Failure to notify triggers an automatic 10% penalty on the next tax bill. This is not discretionary. There is no waiver. There is no grace period for grieving families. Miss the deadline, pay the penalty.

Many surviving spouses do not know this deadline exists because the county does not send a reminder. The death certificate, the probate filing, the property deed recording --- none of these automatically notify the Revenue Commissioner's office. The surviving spouse must affirmatively contact the county, report the ownership change, and update the property tax records. A phone call or visit to the county courthouse handles it. But you have to know to make the call.

The HB73 Assessment Cap: Preserved for Spouses, Lost for Everyone Else

Alabama's HB73 established a 7% annual cap on property tax assessment increases. If your house is assessed at $180,000 and the market value jumps to $260,000 overnight, the assessed value can only increase by 7% per year --- not reset to the new market value. Over time, this cap creates a significant gap between assessed value and market value. Long-time homeowners in appreciating neighborhoods often pay property taxes on assessed values that are 30% to 50% below actual market value.

When the property transfers to a surviving spouse, the HB73 cap is preserved. The assessed value does not reset. The surviving spouse continues to benefit from years of capped increases.

But if the surviving spouse then sells the house to a non-family buyer, the cap resets. The new owner's assessed value reverts to current fair market value. This is relevant in two ways: first, it affects the property's attractiveness to buyers (their tax bill will be higher than the seller's). Second, it means the surviving spouse who keeps the house retains a tax advantage that disappears permanently upon sale. This is not a reason to avoid selling, but it is a factor that belongs in the calculation.

Homestead Exemption Transfer

Alabama offers four homestead exemptions (H-1 through H-4) that reduce the assessed value of a primary residence for property tax purposes. When a homeowner dies, the surviving spouse must apply to transfer the homestead exemption into their own name. The exemption does not transfer automatically. If you do not reapply, the exemption lapses, and your property tax bill increases by the amount the exemption was sheltering --- often $500 to $2,000 per year depending on the county and exemption level.

The application goes to the County Revenue Commissioner's office. Timing matters: file it when you report the ownership change by December 31 and handle both obligations in a single visit.

If you are selling the house rather than keeping it, the homestead exemption question is simpler --- the exemption ends at sale regardless. But if there is any gap between the death and the sale (and there almost always is), maintaining the exemption during that period prevents an unnecessary tax increase on a house you still occupy.

Alabama Taxes Capital Gains as Ordinary Income

Alabama does not have a separate capital gains tax rate. Capital gains are taxed as ordinary income at rates up to 5%. This applies to gains from the sale of inherited property after the step-up in basis is applied.

The federal tax code provides a $250,000 capital gains exclusion for the sale of a primary residence ($500,000 for married couples filing jointly). A surviving spouse who files a joint return for the year of the spouse's death can use the $500,000 exclusion for that tax year. After that, the exclusion drops to $250,000.

In practice, the federal exclusion shelters most surviving spouses from federal capital gains on the home sale. But Alabama has no equivalent state-level exclusion. The entire gain --- after the partial step-up --- is taxable as ordinary Alabama income. For a $100,000 gain, that is up to $5,000 in Alabama state income tax that the federal exclusion does nothing to prevent.

This is the detail that catches surviving spouses who did their research on federal tax rules and assumed Alabama would follow the same pattern. It does not.

Who This Is For

• Surviving spouses who co-owned the house and are considering selling it within the first few years after the death --- you need to understand the 50% step-up, the date-of-death appraisal requirement, and the actual capital gains math before you list the house
• Surviving spouses who plan to keep the house but need to handle the December 31 property tax notification, the homestead exemption transfer, and the HB73 assessment cap preservation before year-end
• Executors managing a sale of the family home on behalf of multiple beneficiaries, where the capital gains calculation determines how much each beneficiary actually receives after taxes
• Families who purchased the house decades ago in now-appreciating neighborhoods (Mountain Brook, Vestavia Hills, Madison, Auburn) where the gap between original purchase price and current value is large enough to make the 50% step-up limitation financially significant
• Anyone who googled "step-up in basis" and found articles explaining the full step-up without mentioning that Alabama is a common law state and the full step-up does not apply to jointly owned property here

Who This Is NOT For

• Surviving spouses in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin) --- those states provide a full step-up on jointly owned community property, and the 50% limitation described here does not apply
• Beneficiaries who inherited property they never co-owned --- if you are an adult child who inherited your parent's house, the entire property receives the step-up because the deceased owned 100% of it. The 50% rule only applies to jointly owned property between spouses in common law states
• Families whose property has not appreciated significantly --- if the house was purchased for $180,000 and is worth $195,000 today, the capital gains exposure after step-up is negligible regardless of whether it is 50% or 100%
• Estates that require a full probate attorney due to contested wills, complex business assets, or Medicaid recovery disputes --- the guide identifies these scenarios explicitly and recommends professional representation

Frequently Asked Questions

Does the surviving spouse's half of the house ever get a step-up in Alabama? No. Under common law property rules, the surviving spouse's ownership interest is not affected by the other spouse's death. Only the deceased spouse's interest receives the step-up. The surviving spouse's basis remains whatever they originally paid (or were allocated at purchase). This is the law in all common law states, not just Alabama. The only way for both halves to step up is if the couple lived in a community property state or if the property was held in a specific trust structure that created the equivalent of community property treatment.

What if the house was titled solely in the deceased spouse's name? If the deceased spouse held title alone (not as joint tenants), the entire property receives the step-up because the deceased owned 100% of it. The 50% limitation only applies when both spouses are on the title as joint owners. Sole ownership produces a better tax result for the surviving spouse --- which is counterintuitive, since joint ownership is often considered the "safe" choice for married couples.

Can I use the $500,000 married exclusion if my spouse died this year? Yes, but only for the tax year in which the spouse died, and only if you file a joint return for that year. If the death occurred in 2026, you can file a joint 2026 return and claim the $500,000 exclusion. Starting in 2027, you file as single (or qualifying surviving spouse for two years if you have a dependent child), and the exclusion drops to $250,000. If you are considering selling, closing the sale in the same calendar year as the death maximizes your federal exclusion.

What happens if I miss the December 31 property tax notification deadline? The County Revenue Commissioner adds an automatic 10% penalty to the next property tax bill. There is no discretionary waiver. The penalty applies to the entire tax amount, not just an incremental portion. For a $2,400 annual tax bill, missing the deadline costs $240. The notification itself is straightforward --- contact the county assessor's office, report the ownership change, and update the records. There is no fee for the notification. Only a penalty for not making it.

Does the HB73 assessment cap survive if I transfer the house to my adult children instead of selling it? It depends on the transfer. Transfers to a spouse preserve the cap. Transfers to non-family members reset it. Transfers to adult children fall into a gray area that varies by county interpretation. Some counties treat parent-to-child transfers as family transfers that preserve the cap; others reset it. Check with your County Revenue Commissioner before transferring. The answer directly affects your children's future property tax bill.

Is the Alabama capital gains tax in addition to federal capital gains tax? Yes. Alabama taxes capital gains as ordinary income, and there is no state-level equivalent of the federal primary residence exclusion. You pay federal capital gains tax (0%, 15%, or 20% depending on income) and Alabama state income tax (up to 5%) on the same gain. The state tax is deductible on your federal return if you itemize, which partially offsets the double taxation --- but it does not eliminate it.

The Alabama Final Tax & Estate Tax Guide costs and includes 9 PDFs: the complete 17-chapter guide, the Alabama Tax After Death Checklist, and 7 standalone printable tools. The Step-Up in Basis Worksheet walks through the 50% calculation for jointly owned Alabama property, and the Property Tax Reference Card puts the December 31 deadline, the 10% penalty, the HB73 assessment cap rules, and the homestead exemption transfer requirements on a single printable page. No subscription, no account required, 30-day money-back guarantee.

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