Tennessee Capital Gains Tax on Real Estate

By Skyline Capital Investments · Updated October 26, 2026 · 6 min read

Does Tennessee have a capital gains tax on real estate?

Not for individuals. Tennessee does not tax wages or capital gains of individuals, and the Hall income tax, which reached only interest and dividends, was repealed for tax years beginning January 1, 2021, according to the Department of Revenue. If you own a Nashville or Memphis apartment building in your own name, or through a general partnership of individuals, you owe no Tennessee tax on the gain when you sell.

Business entities are different. Tennessee charges a franchise tax and an excise tax on corporations, S corporations, limited liability companies and limited partnerships doing business in the state. The excise tax is 6.5% of Tennessee net earnings, and a gain on the sale of a building is part of those earnings. Because most apartment buildings are held in an LLC, many Tennessee sellers do pay a state tax on the gain, just not an income tax.

Who pays Tennessee tax on a property sale

Whether Tennessee taxes your gain depends on how title is held, not on the size of the gain. The table summarizes the Department of Revenue’s rules.

How the Tennessee excise tax works on a sale

The excise tax starts from the entity’s federal net income before loss carryover and special deductions, according to the Department’s ET-1 guidance. Tennessee adjustments are made on Schedule J, income is apportioned if the business operates in more than one state, prior-year losses are deducted, and then the 6.5% rate applies.

For a single-building LLC that owns a Tennessee property, nearly all of the income is Tennessee income, so the gain is taxed at about 6.5%. The franchise tax is separate: 0.25% of net worth apportioned to Tennessee, with a $100 minimum. It is an annual cost of holding the entity, not a tax on the sale itself.

Why most apartment LLCs can’t use the FONCE exemption

The family-owned non-corporate entity (FONCE) exemption removes the franchise and excise tax for qualifying family LLCs and partnerships, but it rarely helps apartment owners. To qualify, at least 95% of the entity must be owned by family members, and at least 66.67% of its activity must be passive investment income or a mix of passive income and farming.

The Department does not treat all rent as passive. Since July 1, 2009, it treats commercial rent as non-passive. It generally follows the property tax classes to decide what is commercial, with one change for dwellings: for FONCE, a dwelling with no more than four rental units is residential and one with more than four is industrial and commercial. (For property tax itself, the line is two rental units.) A family LLC that owns several fourplexes can still qualify, but one that owns a 12-unit building generally can’t.

Federal capital gains tax on a Tennessee sale

For an individual owner, the federal tax is the whole bill. Revenue Procedure 2025-32 sets the 2026 long-term capital gains brackets: married couples filing jointly pay 0% on taxable income up to $98,900, 15% up to $613,700 and 20% above that. Single filers move to 15% above $49,450 and 20% above $545,500.

Two more federal layers apply to most apartment sales. Depreciation you claimed is taxed at up to 25% as unrecaptured section 1250 gain, and the 3.8% net investment income tax applies above $250,000 of modified AGI on a joint return or $200,000 for single filers. A top-bracket seller pays roughly 24% to 29% of the gain to the IRS, depending on how much of it came from depreciation.

Depreciation recapture in Tennessee

Individuals pay no Tennessee tax on recapture, since there is no Tennessee tax on the gain at all. For an LLC or other entity that owes excise tax, recapture is part of federal net income and is taxed at the same 6.5%.

Tennessee also keeps its own depreciation rules for the excise tax. Under the Department’s ET-2 guidance, federal bonus depreciation is allowed for assets bought on or after January 1, 2023 if it was taken on the federal return, but it remains disallowed for assets bought on or before December 31, 2022. If your entity took bonus depreciation on a cost segregation study before 2023, its Tennessee basis in those assets is higher than its federal basis, so the Tennessee gain on sale can be smaller. Ask your preparer to carry the Tennessee schedule forward.

Is there withholding at closing on a Tennessee sale?

No. Tennessee has no state income tax withholding when a resident or nonresident sells real estate. An out-of-state owner selling a Chattanooga building pays only the federal tax, plus whatever their home state charges, and an entity seller settles its excise tax on its annual return.

What Tennessee does charge at closing is the realty transfer tax: 37 cents per $100 of the greater of the price or the property’s value, under T.C.A. 67-4-409. The statute puts it on the grantee, so the buyer pays it to the county register when the deed is recorded. A separate indebtedness tax of $0.115 per $100, after the first $2,000, applies to the buyer’s recorded mortgage.

Worked example: selling a $2 million apartment building in Tennessee

A married couple in the top federal bracket sells a Nashville apartment building for $2,000,000. They bought it in 2016 for $1,000,000, took $330,000 of straight-line depreciation and pay $100,000 in selling costs. Their adjusted basis is $670,000, the amount realized is $1,900,000 and the gain is $1,230,000.

What the example shows

Held personally, the Nashville building costs the couple $309,240 in federal tax and nothing in Tennessee tax. Held in an LLC that owes excise tax, the same sale adds about $79,950, which is more than a Colorado owner would pay in state income tax on the same gain at 4.4%. That gap is why the entity question deserves attention before you list.

Changing ownership just before a sale is not a simple fix. Moving a building out of an LLC may be a taxable event of its own and may bring a new transfer tax on the deed, so work through the options with a CPA well ahead of time. The capital gains tax calculator and the depreciation recapture calculator will help with the federal side.

What to gather before you sell

In Tennessee the paperwork that matters most is about who owns the building, then the usual federal basis records.

• The deed and the entity documents, so you and your CPA know whether the seller is an individual, a general partnership or an LLC that files a franchise and excise return.
• If the owner is an LLC, its last Tennessee return and the Tennessee depreciation schedule, which can differ from the federal one for assets bought before 2023.
• The purchase closing statement and records of capital improvements, which set basis for every return.
• Your federal depreciation schedule, including any cost segregation study.
• A decision on a 1031 exchange before you sign the sale contract.

Moving to Tennessee, or owning Tennessee property from another state

Moving to Tennessee before selling a building in another state does not usually escape that state’s tax. States tax gains on real estate located inside their borders, so a Californian who moves to Franklin and then sells a Los Angeles building still owes California. The move only helps with gains on property that is not tied to the old state.

The reverse also holds. An owner who lives in Georgia or Kentucky and sells a Knoxville building pays no Tennessee tax as an individual, but their home state may tax the gain as a resident. If the building is in an LLC, the LLC owes Tennessee excise tax regardless of where its members live.

How a 1031 exchange changes the Tennessee bill

For individuals, a 1031 exchange matters only federally, because there is no Tennessee tax to defer. In the example, a full exchange into a building of $2,000,000 or more, with all net proceeds reinvested, would defer the $309,240 federal bill.

For an LLC, the exchange does double work. Because the excise tax starts from federal net income, a gain deferred under Section 1031 stays out of the excise base for that year, so the $79,950 is deferred too. Each Tennessee replacement purchase carries the 37-cent transfer tax as the buyer, which we cover with the rest of the exchange rules on our 1031 exchange in Tennessee page.

Selling a Tennessee apartment building to Skyline

Skyline buys apartment buildings with five or more units in Tennessee, from Nashville and Murfreesboro to Memphis, Knoxville and Chattanooga. We buy directly, close on your timeline, and can work inside 1031 deadlines. If your building is in an LLC and the excise tax changes your timing, we can set a closing date that fits your exchange or your tax year.