Does Tennessee recognize 1031 exchanges?
Yes, in the way that matters for each kind of owner. Individuals pay no Tennessee tax on real estate gains, since the state has no personal income tax and the Hall tax on interest and dividends was repealed for tax years beginning January 1, 2021. For them, a Tennessee 1031 exchange works purely under federal law, and there is no state return or form to file for it.
Entities are different. Corporations, LLCs and limited partnerships pay Tennessee’s excise tax of 6.5% on net earnings, and the Department of Revenue’s ET-1 guidance says the excise computation starts from the entity’s federal net income before loss carryover and special deductions. A gain deferred under Section 1031 is not in federal net income for the year, so it is not in the excise base either.
Federal 1031 rules that apply in Tennessee
Tennessee adds no deadlines, so the federal rules control. You have 45 days from the sale to identify replacement property in writing and 180 days, or your return due date if earlier, to close on it. Both properties must be real property held for investment or business use, and a qualified intermediary must hold the money between the sale and the purchase.
Defer all of the gain by buying a replacement of equal or greater value and reinvesting all of the net cash. Cash you keep and debt you are relieved of without replacing are boot. The main 1031 exchange guide explains the full process, and our guide to 1031 exchange rules covers identification and boot in detail.
Why the excise tax makes exchanges matter for Tennessee LLCs
Most apartment buildings are owned through an LLC, and for those owners the excise tax turns a Tennessee sale into a state-taxed event. The family-owned non-corporate entity (FONCE) exemption rarely helps: the Department treats rent from dwellings with more than four rental units as commercial, non-passive rent, so a family LLC that owns a 5-plus unit building generally does not meet the passive income test.
That leaves the exchange as the main way for an LLC to defer the 6.5%. On a $1,000,000 gain, that is $65,000 of state tax kept working in the next property. General partnerships owned by individuals are not taxable entities, according to the Department, so they are in the same position as individual owners.
| Owner | Tennessee tax on a sale | What a 1031 exchange defers |
|---|---|---|
| Individual or married couple | None | Federal tax only |
| General partnership of individuals | None | Federal tax only |
| LLC, LP or corporation | 6.5% excise on Tennessee net earnings | Federal tax and Tennessee excise tax |
Is there Tennessee withholding or a clawback?
No. Tennessee does not withhold income tax at closing from resident or nonresident sellers, so there is no state certificate to file and no withholding to reduce when you exchange. An entity seller settles any excise tax on its annual franchise and excise return.
Tennessee also has no clawback. When you exchange a Tennessee building for property in another state, Tennessee files no claim on the deferred gain and requires no annual tracking form. Clawback rules of that kind exist in California, Massachusetts, Montana and Oregon. An owner coming into Tennessee from one of those states may still owe filings to the state they left.
Transfer and mortgage taxes on a Tennessee exchange
Tennessee’s recordation taxes apply to exchanges the same way they apply to any purchase. The realty transfer tax is 37 cents per $100 of the greater of the price or the property’s value, under T.C.A. 67-4-409, and the law makes the grantee, the buyer, responsible for it. The indebtedness tax on a recorded mortgage or deed of trust is $0.115 per $100 of debt, after the first $2,000.
In an exchange you are a seller on one side and a buyer on the other. Your buyer pays the transfer tax on the building you sell. When you buy a Tennessee replacement, you pay the transfer tax on it and the indebtedness tax on your new loan. Budget those amounts as closing costs, and pay them with exchange funds only if your intermediary and CPA agree that is a proper use, since cash spent on the wrong items can be treated as boot.
Does Tennessee regulate qualified intermediaries?
No. Tennessee is not among the nine states with a law regulating exchange facilitators: California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia and Washington. That means no Tennessee bond, insurance or account requirement protects the money your intermediary holds.
Do the checks yourself. Ask for proof of a fidelity bond and errors and omissions coverage, ask whether your funds will sit in a separate account in your name or a pooled account, and ask who must sign to move money. Requiring both your signature and the intermediary’s on withdrawals is the simplest protection. The intermediary also cannot be your agent from the past two years, such as your attorney, accountant, employee or broker. Our guide to choosing a 1031 qualified intermediary covers fees and contract terms.
Common 1031 exchange paths for Tennessee owners
Most exchanges by Tennessee owners follow one of three paths.
Tennessee to Tennessee is common for owners trading up in Middle Tennessee, for example from older Nashville buildings into a larger property in Murfreesboro, Clarksville or Franklin. For an LLC, the excise tax stays deferred, and the buyer side carries the transfer and mortgage taxes.
Tennessee to another state works without any Tennessee follow-up filing. The deferred gain moves with you, and when you later sell the replacement in a taxable sale, the state where it sits and your home state decide who taxes it.
Another state into Tennessee is a frequent path for owners leaving high-tax states. The exchange is governed by federal law and the old state’s rules. Once you own Tennessee property personally, a later taxable sale owes no Tennessee income tax; if you buy through an LLC, the excise tax applies to that future sale.
Worked example: a Tennessee LLC exchanges a Memphis building
An LLC owned by two individuals sells a 24-unit building in Memphis for $2,000,000. After $100,000 of selling costs and with an adjusted basis of $850,000, including $300,000 of depreciation taken, the gain is $1,050,000. The $900,000 loan is paid off, and the remaining $1,000,000 goes to the qualified intermediary.
The LLC buys a $2,400,000 building in Knoxville with the $1,000,000 of exchange funds and a new $1,400,000 loan. It reinvests all of the cash and takes on more debt than it paid off, so the full $1,050,000 gain is deferred. The Tennessee excise tax deferred is $68,250 (6.5% of the gain). For members in the top federal bracket, the federal tax deferred is about $264,900: $75,000 on the depreciation at 25%, $150,000 on the rest of the gain at 20%, and $39,900 of net investment income tax.
On the Knoxville purchase, the LLC as buyer pays $8,880 of transfer tax (37 cents per $100 of $2,400,000) and $1,607.70 of indebtedness tax on the new loan ($0.115 per $100 of $1,398,000). The Memphis buyer pays the $7,400 transfer tax on that deed.
| Item | Amount |
|---|---|
| Sale price | $2,000,000 |
| Gain deferred | $1,050,000 |
| Tennessee excise tax deferred (6.5%) | $68,250 |
| Federal tax deferred (top bracket members) | $264,900 |
| Transfer tax on Knoxville purchase (paid by the LLC) | $8,880 |
| Indebtedness tax on the $1,400,000 loan | $1,607.70 |
| Transfer tax on the Memphis sale (paid by that buyer) | $7,400 |
What happens when you sell the replacement
Deferral is not forgiveness. The deferred gain carries into the replacement through its lower basis, and it is taxed when you sell that property in a taxable sale, unless you exchange again or hold it until death.
In the example, if the LLC later sells the Knoxville building for cash, the $1,050,000 of deferred gain is part of the gain on that sale, and the excise tax applies to it at the rate in effect then. An individual who owns a Tennessee replacement in their own name would owe federal tax on the deferred gain but still no Tennessee tax, which is one reason some owners review how title is held before the next sale.
Timeline tips for a Tennessee exchange
Plan the replacement before the sale closes. The 45-day identification clock starts at closing, and Tennessee adds no extra time.
- Sign the exchange agreement and assign the sale contract before closing, not at the table.
- Check the intermediary’s bond, insurance and account setup in writing, since no Tennessee statute requires them.
- For an LLC, confirm with your CPA that the entity selling and the entity buying are the same taxpayer.
- Budget the transfer and indebtedness taxes on the replacement as part of your cash needs.
- If you sell late in the year, extend your federal return so the due date does not cut the 180 days short.
Selling a Tennessee apartment building as part of an exchange
Skyline buys apartment buildings with five or more units in Tennessee. We buy directly, close on your timeline, and can work inside 1031 deadlines. We work with your intermediary on the contract assignment and can set a closing date that gives you time to line up a replacement before your 45 days start.
For the tax you would owe without an exchange, see Tennessee capital gains tax on real estate. The 1031 exchange calculator runs the federal side for your own numbers.
Selling? Spread the tax with seller-carry terms
If a large tax bill is what is keeping you from selling, an installment sale may help. When you carry part of the price as a note, the gain is generally reported as you receive payments instead of all in the year of sale. Some parts of the gain, such as certain depreciation recapture, can still be due up front, so run the numbers with your CPA first.
Skyline Capital Investments buys apartment buildings with five or more units and can offer seller-carry terms, or a delayed closing that fits your 1031 timeline. Send the address and unit count and we typically respond within 48 hours. How seller financing works · How an installment sale is taxed · Seller financing calculator.
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