How Tennessee capital gains tax on rental property works
A rental sale in Tennessee is taxed federally like anywhere else: depreciation recapture at your ordinary rates up to 25%, the rest of a long-term gain at 0%, 15% or 20%, and the 3.8% net investment income tax at higher incomes. No state income tax, so no Tennessee tax on the gain.
Tennessee's recordation taxes
Tennessee's realty transfer tax is 37 cents per $100 of the price or the property's value, whichever is greater: $1,850.00 on the example's $500,000 sale. The buyer (the grantee) pays it, and the county register collects it when the deed is recorded.
If the buyer finances the purchase, the loan is subject to the indebtedness tax: 11.5 cents per $100 of the debt, after the first $2,000.
Worked example: selling a Tennessee rental
A single investor earning $90,000 bought a Tennessee rental in June 2016 for $300,000, paid $6,000 in closing costs and later spent $20,000 on improvements. They sell in November 2026 for $500,000 with 6% selling costs. Estimated depreciation of $92,727.27 leaves a gain of $236,727.27.
| Amount | |
|---|---|
| Federal income tax | $43,218.54 |
| Net investment income tax | $4,815.64 |
| Tennessee tax | $0.00 |
| Total tax | $48,034.18 |
| Cash kept after the $150,000 mortgage payoff | $271,965.82 |
The whole $48,034.18 is federal tax, 20.3% of the gain.
| Situation | Gain | Tennessee tax | Total tax |
|---|---|---|---|
| Single, $40,000 of other income | $236,727.27 | $0.00 | $42,484.18 |
| Single, $90,000 of other income (the example) | $236,727.27 | $0.00 | $48,034.18 |
| Married, $200,000 of other income | $236,727.27 | $0.00 | $50,078.18 |
| A flip sold after 9 months | $39,800.00 | $0.00 | $8,756.00 |
The first three rows sell the same property; the flip is a $360,000 sale of a house bought for $250,000 with $40,000 of work, held under a year, so its gain is short-term.
Tennessee vs. neighboring states
State tax on the same $500,000 sale in Missouri, Arkansas, Kentucky, North Carolina, Mississippi, Georgia, Alabama and Virginia, lowest first. Each state links to its own calculator.
| State | How the gain is taxed | State tax | Total tax |
|---|---|---|---|
| Tennessee | No state income tax, so no Tennessee tax on the gain. | $0.00 | $48,034.18 |
| Missouri | Missouri deducts 100% of capital gains, so the gain isn't taxed by the state. | $0.00 | $48,034.18 |
| Arkansas | 50% of a long-term gain is exempt (and any gain above $10 million); the rest is taxed at Arkansas's rates. | $4,379.45 | $52,413.63 |
| Kentucky | Taxed as ordinary income at the state's income tax rates. | $8,285.45 | $56,319.63 |
| North Carolina | Taxed as ordinary income at the state's income tax rates. | $9,445.41 | $57,479.59 |
| Mississippi | Taxed as ordinary income at the state's income tax rates. | $9,469.09 | $57,503.27 |
| Georgia | Taxed as ordinary income at the state's income tax rates. | $11,812.69 | $59,846.87 |
| Alabama | Taxed as ordinary income at the state's income tax rates. | $11,836.36 | $59,870.54 |
| Virginia | Taxed as ordinary income at the state's income tax rates. | $13,611.82 | $61,646.00 |
Where the property is matters as much as where you live: states tax gains on real estate located in them, so selling a rental in another state usually means filing there too.
All 50 states and D.C. are compared on the same sale in the state tax on selling a rental table, which you can sort and download.
Self-employed in Tennessee? The Tennessee 1099 tax calculator works out the federal income and self-employment taxes on freelance income, with the quarterly estimated payments.
States with similar rules
Tennessee is one of 10 states that don't tax the gain on a rental sale. These are the closest to it on the same $500,000 sale:
- New Hampshire: No state income tax, so no New Hampshire tax on the gain. Its page covers New Hampshire's real estate transfer tax.
- South Dakota: No state income tax, so no South Dakota tax on the gain. Its page covers South Dakota's real estate transfer fee.
- Texas: No state income tax, so no Texas tax on the gain. Its page covers Texas's ban on new real estate transfer taxes.
- Washington: Washington's capital gains tax exempts real estate, and it has no income tax. Its page covers Washington's real estate excise tax.
Before you sell a rental in Tennessee
The sale of a rental goes on IRS Form 4797, which carries the gain to Schedule D and the depreciation part to the unrecaptured section 1250 gain worksheet. Before you file, gather the closing statements from both the purchase and the sale, your depreciation schedules (Form 4562 or your tax software's asset list) and receipts for improvements. Each of them changes your adjusted basis, and with it the gain.
A large gain can also bring an underpayment penalty if no tax is paid on it during the year. Federally, you avoid the penalty by paying, through withholding or estimated payments, at least 90% of this year's tax or 100% of last year's (110% if last year's AGI was over $150,000). Sending the tax on the sale with the next quarterly estimate is the simplest way to stay inside those rules. Because Tennessee doesn't tax the gain, there is no state estimate to make.
If the rental produced losses you couldn't deduct under the passive activity rules, selling your entire interest to an unrelated buyer generally frees them in the year of the sale, which offsets part of the gain.
With no Tennessee tax on the gain, the federal tax is the whole bill, so federal planning carries more weight: holding the property more than a year, spreading the gain over several years with an installment sale, selling in a year with less other income, or deferring all of it with a 1031 exchange into another investment property. Turn on the calculator's second scenario to see how each choice changes the tax and the cash you keep. If you once lived in the property, part of the gain may also qualify for the home sale exclusion, though the depreciation part stays taxable.
The bottom line
Rental property capital gains tax in Tennessee is federal only: $48,034.18 on the example's $236,727.27 gain.
Enter your own numbers in the calculator to estimate your Tennessee capital gains tax on rental property, compare a sale with a 1031 exchange, and confirm the details with the Tennessee Department of Revenue or a tax professional before you sell.
Frequently asked questions
Does Tennessee tax capital gains on rental property?
No. No state income tax, so no Tennessee tax on the gain. Its realty transfer tax, 37 cents per $100, is the buyer's to pay. You still owe federal tax on the gain, which is the sale price minus selling costs and your adjusted basis (what you paid, plus improvements, minus depreciation): on a $500,000 sale of a rental bought for $300,000 in 2016, a single seller earning $90,000 owes about $48,034.18 in federal income tax and net investment income tax. The calculator above adds up the taxes on selling rental property in Tennessee for your own numbers.
How is depreciation recapture taxed in Tennessee?
Federally, the part of the gain that comes from depreciation, called unrecaptured section 1250 gain or depreciation recapture, is taxed at your ordinary rates up to 25%. Tennessee doesn't tax any part of the gain, so only the federal tax applies.
Can a 1031 exchange defer Tennessee tax on a rental sale?
With no Tennessee tax on the gain there is nothing to defer at the state level, but a 1031 exchange still defers the federal tax if you reinvest in like-kind property within the 45- and 180-day deadlines.
Does the 3.8% net investment income tax apply in Tennessee?
Yes. The net investment income tax is federal, so it applies the same way in every state: 3.8% of the gain or of your modified adjusted gross income above $200,000 ($250,000 joint), whichever is smaller. In the example it adds $4,815.64.
Do I owe Tennessee tax if I sell a rental there but live in another state?
Not to Tennessee. Your home state may tax the gain if it has an income tax.
Sources and further reading
- REC-1: Recordation Tax Overview (opens in a new tab), Tennessee Department of Revenue
- REC-11: Transfer Tax, Responsible Party for Paying and Collecting (opens in a new tab), Tennessee Department of Revenue
- Tenn. Code Ann. § 67-4-409, Recordation tax (opens in a new tab), Tennessee Code (Justia)
- Tennessee Department of Revenue (opens in a new tab), State of Tennessee
- Publication 544, Sales and Other Dispositions of Assets (opens in a new tab), Internal Revenue Service
- Instructions for Schedule D (Form 1040) (opens in a new tab), Internal Revenue Service
Related calculators
- Rental Property Depreciation CalculatorDon't know how much depreciation you've taken? Build the schedule from the IRS tables, improvements included.
- 1031 Exchange CalculatorBuying another rental with the proceeds? See how much of the gain a 1031 exchange defers.
- Hard Money Loan CalculatorFlipping your next property? Model the rehab loan, cash to close and the flip's profit before tax.