1031 Exchange Rules in Tennessee

Last reviewed: June 2026. State rules change. Verify current rules before closing.

What Is Different in Tennessee

Tennessee has no state individual income tax, no state capital gains tax, no withholding at closing, and no state exchange paperwork. Nashville, Memphis, Knoxville, Chattanooga: wherever you sell, the state adds nothing to the exchange. The taxes a Tennessee investor defers with a 1031 exchange are federal, and they can exceed 28% of a typical gain.

Does Tennessee Conform to IRC Section 1031?

There is nothing to conform to. Tennessee has no personal income tax, so the state takes no position on your exchange. A 1031 exchange is an IRS-approved way to sell investment property and buy replacement property without paying tax on the gain right away. In Tennessee, the exchange is purely a federal matter. Our 1031 exchange guide walks through how it works.

One housekeeping note for entity owners: Tennessee imposes franchise and excise taxes on many business entities, including some LLCs that hold rental property. They are not taxes on your sale, but ask your CPA how your entity structure is treated before and after the exchange.

Tennessee Tax Rate on Real Estate Gains

Zero. Tennessee does not tax individual income or capital gains.

Withholding at Closing

None. Tennessee has no withholding requirement on real estate sales, for residents or nonresidents. No exemption forms, no state certificates, no waiting on a state refund.

Federal Taxes Still Apply

Without an exchange, a Tennessee sale faces three federal layers.

Example: $1,000,000 sale of a Tennessee rental. Original purchase $600,000, with $100,000 of depreciation taken, so the adjusted basis is $500,000 and the total gain is $500,000.

Figures are illustrative and rounded. Your rates depend on income, filing status, and basis. A qualifying 1031 exchange may defer all three federal layers. Run your numbers with our 1031 exchange calculators, then confirm them with your tax advisor.

Crossing State Lines

Tennessee borders eight states, and several of them have real withholding rules.

• Selling in Georgia, buying in Tennessee. Georgia withholds 3% at closing unless the exchange qualifies for exemption. A fully deferred federal 1031 owes no Georgia withholding; the seller documents it with Form IT-AFF3 at closing.
• Selling in Mississippi, buying in Tennessee. Mississippi's withholding statute does not apply to qualifying exchanges; the seller provides an affidavit (Form 89-387).
• Selling in Alabama, buying in Tennessee. Alabama withholds 3% to 4% on sales over $300,000, with a closing exemption for fully deferred exchanges (Form NR-AF3).

Risks to Keep in Mind

• Federal deadlines are unforgiving. You have 45 days to identify replacement property and 180 days to close. See the IRS rules for 1031 exchanges.
• Boot is still taxable. Cash you take out or debt you fail to replace can create recognized gain, even with no state tax in play.
• Deferral is not elimination. The federal tax comes due when you eventually sell without exchanging, unless your estate plan uses the step-up in basis. Ask your estate planning attorney.
• Out-of-state obligations follow you. A prior exchange out of a claw-back state (California, Oregon, Montana, or Massachusetts) can carry filing duties into your new ownership.

Tennessee 1031 Exchange FAQs

Does Tennessee tax 1031 exchanges?
No. Tennessee has no state income tax, so there is no state tax to defer and no state exchange filing.

Why bother with a 1031 exchange in Tennessee if there is no state tax?
Federal taxes. Capital gains, depreciation recapture, and the net investment income tax can take more than a quarter of a typical gain. An exchange may defer all of it.

My rental is in an LLC. Anything special in Tennessee?
Possibly. Tennessee franchise and excise taxes apply to many entities. They are separate from the exchange, but your CPA should review your structure.

Do I still need a qualified intermediary?
Yes. The qualified intermediary requirement is federal. You cannot touch the sale proceeds and still qualify for deferral, no matter what state you are in.

Sources

• Internal Revenue Service, Like-Kind Exchanges, Real Estate Tax Tips
• Tax Foundation, State Individual Income Tax Rates and Brackets, 2026

Want to learn more? Our 1031 exchange guide covers the full process from sale to replacement. Ready to start a Tennessee exchange? WealthBuilder 1031 is attorney-owned, serves all 50 states, and charges a flat $1,000 fee. Start at WealthBuilder1031.com or call 888-508-1901.

This page does not constitute legal or tax advice. Consult your attorney and tax advisor about your specific situation.

Ready to start your Tennessee 1031 exchange? WealthBuilder 1031 acts as your qualified intermediary for a flat $1,000 fee, $750 at your sale and $250 at your purchase. See our Tennessee 1031 exchange services to get started.