Tennessee capital gains tax: what real estate investors actually pay

Does Tennessee have a capital gains tax?

No. Tennessee does not levy a state capital gains tax on individuals, because it has no state individual income tax at all. When you personally sell an appreciated rental property, flip, stock position, or business interest as a Tennessee resident, the state takes nothing from the gain.

Tennessee’s last individual-level tax was the Hall income tax, enacted in 1929, which applied only to interest and dividend income — never to capital gains from selling property. The legislature phased the Hall tax down starting in 2016 and repealed it entirely effective January 1, 2021, according to the Tennessee Department of Revenue. Since then, Tennessee has taxed no form of individual income.

That puts Tennessee in a small group of states with no individual capital gains tax, alongside Florida, Texas, Wyoming, and a handful of others. You can see how they compare in our guide to states without capital gains tax. The zero-tax headline is real — but it applies to individuals, not necessarily to the entities investors use to hold property, which is where the next two sections matter.

Federal capital gains tax still applies

Living or investing in Tennessee does not change your federal tax bill by one dollar. The IRS taxes capital gains the same in Nashville as in New York — what Tennessee removes is only the state layer that investors elsewhere pay on top.

Federally, the tax treatment depends on how long you held the asset. Gains on property held more than one year are long-term and taxed at preferential rates of 0%, 15%, or 20% depending on your taxable income, per IRS Topic 409. Gains on property held one year or less are short-term and taxed at your ordinary income rate — a distinction that matters enormously for flippers.

Rental property sales carry two additional federal layers. Depreciation you claimed (or could have claimed) while renting the property is recaptured at a rate of up to 25% when you sell, and higher earners may owe the 3.8% net investment income tax on top of the capital gains rate. Both apply in Tennessee exactly as they do everywhere else.

The big caveat: Tennessee franchise and excise taxes on LLCs

Tennessee’s zero-tax reputation has one major exception investors need to plan around: the state’s franchise and excise (F&E) taxes apply to most LLCs, limited partnerships, and corporations doing business in Tennessee — including entities whose only activity is holding rental property.

The excise tax is 6.5% of an entity’s Tennessee net earnings, which can include the gain when the entity sells an appreciated property. The franchise tax is 0.25% of the entity’s net worth, with a $100 minimum, due every year the entity exists — even in years with no sale. Details and current rules are published by the Tennessee Department of Revenue.

Critically, Tennessee does not follow the federal disregarded-entity treatment for most single-member LLCs. An LLC that is invisible on your federal return can still be a separate taxpayer for Tennessee F&E purposes. Many out-of-state investors discover this only after forming an LLC for liability protection and receiving a filing notice.

Exemptions exist, and they matter. The most relevant for real estate investors is the family-owned non-corporate entity (FONCE) exemption, which can apply when at least 95% of the entity is owned by family members and substantially all of its income comes from passive investments — a category that includes rents from residential property but generally not commercial or industrial property. Exemptions must be applied for and renewed, so verify eligibility with the Tennessee Department of Revenue and a Tennessee CPA before assuming your LLC qualifies.

Flippers vs. landlords: the federal treatment is different

How the IRS classifies your activity matters more in Tennessee than the state tax code does. Landlords who sell after holding for more than a year get long-term capital gains treatment; active flippers frequently do not.

When you buy, renovate, and resell properties as a regular business, the IRS can treat you as a dealer — meaning profits are ordinary business income, taxed at your regular federal rate and potentially subject to self-employment tax, with no long-term capital gains discount regardless of state. Most sub-one-year flips are taxed at ordinary rates even without dealer status, simply because the holding period is short. If you flip in Tennessee, model your deals at ordinary federal rates and treat capital gains treatment as the exception, not the rule. Our Tennessee fix and flip loan page covers how investors finance those projects.

Buy-and-hold investors get the friendlier path: long-term federal capital gains rates on appreciation, depreciation deductions along the way, and zero Tennessee tax at the individual level. Rental income itself is also free of state income tax, which improves cash-on-cash returns relative to high-tax states. That combination is a big part of why DSCR investors target Nashville, Memphis, Knoxville, and Chattanooga — see our Tennessee DSCR loan page for how those purchases are financed without tax returns.

Ways Tennessee investors manage the federal bill

Since Tennessee already contributes nothing to your capital gains bill, tax planning for Tennessee investors is entirely a federal exercise. Several well-established strategies can defer or reduce federal capital gains tax on investment real estate — all of them worth discussing with a tax professional before you list a property.

• Hold for more than one year — crossing the 12-month line converts gains from ordinary income rates to the 0%/15%/20% long-term schedule.
• 1031 exchange — reinvesting sale proceeds into like-kind investment property through a qualified intermediary defers federal capital gains tax and depreciation recapture (IRS Form 8824 rules apply).
• Primary residence exclusion — Section 121 lets homeowners exclude up to $250,000 of gain ($500,000 married filing jointly) on a home they owned and used as a primary residence for at least two of the last five years; it does not apply to pure rentals.
• Track your cost basis — capital improvements, closing costs, and selling expenses raise basis and shrink the taxable gain; poor records mean overpaying.
• Harvest losses — selling underperforming assets in the same tax year can offset gains dollar for dollar at the federal level.

How Tennessee compares to other no-tax states

Tennessee’s individual tax treatment matches the other no-income-tax states, but its entity-level taxes are heavier than most of its peers. Florida imposes corporate income tax but leaves pass-through LLCs alone; Texas applies a franchise tax that exempts entities under a revenue threshold; Wyoming imposes no income tax and only a modest annual report fee on LLCs. Tennessee’s F&E regime, by contrast, reaches even small single-property LLCs unless an exemption applies.

For an individual selling property held in their own name, all of these states produce the same result: zero state capital gains tax. The differences show up in how you hold property. Investors comparing markets can dig into the specifics in our Florida and Texas capital gains guides.

None of this makes Tennessee uncompetitive — a 0.25% franchise tax and 6.5% excise tax on entity earnings is still far lighter than the 5-13% state income tax an investor pays personally in states like California or New York. It simply means Tennessee investors should price entity-level taxes into their underwriting rather than assuming the zero-tax headline covers everything.

Entity structure, taxes, and financing your next Tennessee purchase

The F&E caveat creates a genuine planning decision for Tennessee investors: holding property in an LLC delivers liability protection and cleaner partnership structures, but may add an annual state tax cost that direct personal ownership avoids. There is no universal right answer — a single rental held personally, an exempt FONCE structure, and a taxable multi-property LLC can each be correct depending on your liability exposure, family ownership, and portfolio size. That is a conversation for a Tennessee CPA and attorney, not a rule of thumb.

What the entity question should not do is limit your financing. Business-purpose lenders are built for entity ownership — DSCR and fix-and-flip loans routinely close in the name of an LLC or corporation, so the structure your advisors recommend for tax and liability reasons is the same structure the loan can accommodate. You can pressure-test how a Tennessee rental’s numbers pencil with our DSCR calculator before you ever talk to a lender.

One compliance note worth repeating: no loan structure eliminates or reduces taxes. Financing determines your leverage and cash flow; federal law and Tennessee’s F&E rules determine your tax bill. Keep the two analyses separate and run both before closing.

Where Mortava fits

Mortava is a direct lender for business-purpose investor loans in all 50 states, including Tennessee. For buy-and-hold investors, our Tennessee DSCR loans qualify on the property’s rental income rather than your personal tax returns — up to 85% LTV on purchases, 30- and 40-year fixed and interest-only options, and loan amounts from $100K to $3.5M. For flippers, our Tennessee fix and flip loans fund up to 95% of total cost with 100% of rehab financed and term sheets in as little as 2 hours.

Both programs close in an LLC or corporation, which pairs naturally with the entity structures Tennessee investors use — just confirm the franchise and excise implications of your structure with a Tennessee CPA first. Quotes start with a soft credit inquiry, so checking your terms will not affect your credit score. Explore the full DSCR rental loan program or request an indicative term sheet to see where your deal lands.

Frequently asked questions

• Tennessee Department of Revenue — Hall Income Tax
• Tennessee Department of Revenue — Franchise & Excise Tax
• IRS — Topic No. 409, Capital Gains and Losses
• IRS — Topic No. 559, Net Investment Income Tax
• IRS — Publication 523, Selling Your Home