1031 Exchange in Tennessee
Tennessee is one of the simplest states in which to complete a 1031 exchange: it levies no personal income tax, so there is no state-level capital gains tax to defer, no state withholding on property sales, and no state clawback to track. The Hall income tax — Tennessee's former tax on interest and dividends — was fully repealed for tax years beginning January 1, 2021, leaving no personal income tax of any form. Investors completing a 1031 exchange in Tennessee only need to satisfy the federal requirements under IRC Section 1031.
Fast Facts
- State Income Tax Rate
- 0%. Tennessee levies no personal income tax. The Hall income tax on interest and dividends was fully repealed for tax years beginning January 1, 2021 (Tennessee Department of Revenue).
- Conforms to Federal 1031
- Not applicable in the usual sense — because Tennessee has no personal income tax, there is no state-level gain to defer. Only the federal rules under IRC Section 1031 apply.
- Non-Resident Withholding
- None. Tennessee has no personal income tax, so it imposes no income-tax withholding on non-residents selling real property.
- Property Tax Considerations
- Property taxes are set and collected at the county and municipal level. By state law, residential and farm property is assessed at 25% of appraised value and commercial/industrial property at 40% (Tennessee Comptroller of the Treasury).
- Qualified Intermediary Requirements
- Tennessee has no state statute regulating or licensing qualified intermediaries (exchange facilitators). Only federal requirements under Treas. Reg. 1.1031(k)-1(g)(4) apply.
Legal and Tax Considerations
State Income Tax Rate
0%. Tennessee levies no personal income tax. The Hall income tax on interest and dividends was fully repealed for tax years beginning January 1, 2021 (Tennessee Department of Revenue).
Conforms to Federal 1031
Not applicable in the usual sense — because Tennessee has no personal income tax, there is no state-level gain to defer. Only the federal rules under IRC Section 1031 apply.
Non-Resident Withholding
None. Tennessee has no personal income tax, so it imposes no income-tax withholding on non-residents selling real property.
Property Tax Considerations
Property taxes are set and collected at the county and municipal level. By state law, residential and farm property is assessed at 25% of appraised value and commercial/industrial property at 40% (Tennessee Comptroller of the Treasury).
Qualified Intermediary Requirements
Tennessee has no state statute regulating or licensing qualified intermediaries (exchange facilitators). Only federal requirements under Treas. Reg. 1.1031(k)-1(g)(4) apply.
Required Documentation
- Federal Form 8824
- No state-specific forms required
Clawback Rule
None
Step-by-Step Process
- 1
Identify Replacement Property
You must identify potential replacement properties within 45 days of selling your relinquished property. In Tennessee, consider local property tax rates and zoning regulations when identifying properties.
- 2
Engage a Qualified Intermediary
Work with a qualified intermediary to hold the exchange funds and prepare the exchange documentation before you close on the sale of your relinquished property. Tennessee imposes no state-specific QI requirements, so federal rules govern.
- 3
Close on Replacement Property
Complete the purchase of your replacement property within 180 days of selling your relinquished property (or by your federal tax return due date, including extensions, if earlier).
- 4
File Tax Returns
Report your 1031 exchange on your federal tax return using Form 8824. No state income tax return is required in Tennessee.
- 5
No State Tax Filing
Tennessee has no personal income tax, so there is no state income tax filing associated with the exchange and no state clawback if you later sell the replacement property while living elsewhere.
- 6
Property Tax Assessment
Tennessee property taxes are assessed and collected at the local level, with rates varying between counties and municipalities. Residential property is assessed at 25% of appraised value and commercial/industrial property at 40%, per state law.
- 7
Local Regulations
Review local zoning regulations and development codes, which vary between Tennessee municipalities. Urban areas like Nashville and Memphis have more comprehensive zoning requirements, while rural areas often have fewer restrictions.
Timeline Calculator
Enter the closing date of your relinquished property to calculate your 1031 exchange deadlines:
Common Pitfalls
Underestimating regional market variations
Issue
Tennessee's real estate markets vary significantly between regions, with Nashville, Memphis, Knoxville, and Chattanooga each having distinct characteristics and price points.
Prevention
Research specific local market conditions rather than relying on statewide averages. Connect with local real estate professionals who understand the nuances of your target market.
Overlooking property tax variations
Issue
While Tennessee has no state income tax, property tax rates are set locally and vary across counties and municipalities. Assessment ratios also differ by property class: 25% of appraised value for residential and farm property versus 40% for commercial/industrial property.
Prevention
Look up the specific county and municipal property tax rates before acquiring replacement properties, and account for the higher commercial assessment ratio in your cash flow projections.
Misunderstanding short-term rental regulations
Issue
Some Tennessee municipalities, particularly Nashville, require permits for short-term rentals and restrict non-owner-occupied short-term rentals in certain zoning districts, which may impact investment strategies.
Prevention
Research local short-term rental regulations before acquiring properties intended for this use. Consider working with a local attorney who specializes in real estate law to navigate these regulations.
Neglecting flood zone considerations
Issue
Parts of Tennessee, particularly areas near rivers and in certain regions of Nashville and Memphis, are prone to flooding, which can impact property values and insurance costs.
Prevention
Conduct thorough due diligence on flood zones and water management issues before acquiring property. Consider flood insurance costs in your investment analysis.
Frequently Asked Questions
Does Tennessee have any special requirements for 1031 exchanges?
No. Tennessee imposes no state-specific requirements on 1031 exchanges. Because the state has no personal income tax, only the federal rules under IRC Section 1031 apply, and there is no state form to file alongside federal Form 8824.
What is Tennessee’s state income tax rate for capital gains?
Tennessee has no personal income tax, which means there is no state-level tax on capital gains. The Hall income tax, which previously applied only to interest and dividend income, was fully repealed for tax years beginning January 1, 2021. Investors therefore only need to defer federal capital gains taxes through a 1031 exchange.
Can I exchange a property in another state for a property in Tennessee?
Yes. Section 1031 is a federal provision that allows exchanges across state lines. Note that if your relinquished property is in a state with an income tax, that state may still tax the deferred gain later or impose its own withholding or clawback rules — Tennessee itself adds nothing on top.
Does Tennessee withhold taxes when a non-resident sells property?
No. Because Tennessee has no personal income tax, it imposes no income-tax withholding on real estate sale proceeds, for residents or non-residents.
Major Cities
Nashville, Memphis, Knoxville, Chattanooga, Clarksville, Murfreesboro, Franklin, Johnson City, Kingsport, Hendersonville
References
Official References
- Tennessee Department of Revenue
- Tennessee Department of Revenue – Hall Income Tax (Repealed for Tax Years Beginning January 1, 2021)
- Tennessee Comptroller of the Treasury – How to Calculate Your Tax Bill
- Tennessee Real Estate Commission
- IRS – Like-Kind Exchanges (Form 8824)
This information is for educational purposes only and is not legal or tax advice. Consult with qualified professionals regarding your specific situation.