1031 exchange in
Tennessee.

Does Tennessee follow federal 1031 rules?

Tennessee has no state income tax on individuals, so there is no state-level 1031 conformity question — federal 1031 mechanics are the entire game. TN's Franchise & Excise Tax applies to entities doing business in TN (not individuals), and there is no non-resident withholding at closing.

Tennessee capital gains tax structure

Tennessee imposes no individual income tax and no tax on capital gains for individuals. The Hall Income Tax (the legacy 6% tax on interest and dividends) was fully repealed effective tax years beginning January 1, 2021. TN does levy a Franchise & Excise Tax on entities, which can affect holding-LLC structure but does not directly tax non-resident individual capital gains.

Tennessee has no individual income tax and no individual capital gains tax — federal returns only for individuals. The Hall Income Tax (the legacy 6% tax on interest and dividends, named for State Senator Frank Hall who introduced it in 1929) was phased down 1% per year from 2017 and fully repealed effective tax years beginning January 1, 2021. Some pre-2021 Hall Tax exposure may still exist for years not yet examined or audited. The Franchise & Excise Tax applies to entities — 6.5% excise on net earnings plus a 0.25% franchise tax on the greater of net worth or tangible property in TN. For a single-member LLC owned by a non-resident individual that is disregarded for federal tax purposes, the F&E tax can still apply at the entity level depending on activities, which is the under-appreciated structural issue. Sales tax 7% state plus up to 2.75% local — among the highest combined sales tax rates in the country.

Federal tax treatment of a successful 1031 is deferral of capital gain and unrecaptured Section 1250 depreciation recapture (federally taxed at a maximum 25% when eventually recognized). Tennessee's state treatment sits on top of those federal rates.

Common 1031 replacement strategies in Tennessee

Nashville is the magnet — music, healthcare (HCA, Vanderbilt, Ascension Saint Thomas), distribution, and a cultural-economic story that attracted enormous cross-border 1031 capital from CA, NY, IL, and NJ over 2018-2024. Multifamily cap rates compressed to mid-4s on Class A by 2022, then widened to 5.0-5.75% through 2024-2025 as the supply pipeline (~11,800 new units per year in 2023-2024) overshot. Cap rates stabilizing in mid-5s into 2026 with selective compression on stabilized A. Memphis is the FedEx World Hub story — Memphis International Airport hosts FedEx's primary global hub (currently undergoing $1B renovation), driving the deepest industrial absorption east of DFW. Industrial cap rates 5.5-6.75% on credit-tenant; multifamily wider at 6.5-8% given softer demographic story. Knoxville is University of Tennessee + Oak Ridge National Laboratory anchor (multifamily 5.75-6.75%, NNN retail 6.5-7.5%). Chattanooga is the surprise — Volkswagen plant, Amazon, Gig City fiber infrastructure, and Tennessee River downtown revitalization (multifamily 5.75-6.75%, industrial 6.0-7.5%).

Top Tennessee CRE markets for 1031 buyers

Nashville

Nashville was the hottest 1031 destination in the Southeast 2018-2024 — Class A multifamily compressed to mid-4% caps as cross-border capital from CA, NY, and IL overwhelmed local supply. The 2023-2024 delivery wave (~11,800 units per year, nearly double the 10-year average) crushed lease-ups and widened cap rates to 5.0-5.75% on Class A through 2024-2025. Cap rates stabilizing in mid-5s into 2026 with selective compression on stabilized assets. HCA, Vanderbilt Medical, Ascension Saint Thomas, and the music industry anchor employment. Submarkets: The Gulch and SoBro are the most institutional, Brentwood and Franklin are suburban-A, East Nashville is value-add. Industrial along I-24 and I-40 trades 5.75-6.75% on credit-tenant.

Memphis

FedEx World Hub at Memphis International Airport drives the entire industrial story — FedEx's primary global hub is currently undergoing a $1B renovation. Industrial absorption in the Memphis MSA has been among the deepest in the country for 5+ years. Cap rates on stabilized credit-tenant industrial 5.5-6.75%, big-box logistics 5.5-6.25%. Multifamily is wider — Class B/C 6.5-8% reflecting softer demographic and crime-narrative headwinds. Memphis is an industrial 1031 destination first, multifamily second. The medical complex (St. Jude, Methodist, Baptist Memorial) anchors a credible medical office market.

Knoxville

University of Tennessee and Oak Ridge National Laboratory anchor a steady employment story. Class B multifamily trades 5.75-6.75%, with student-adjacent and downtown product tighter (sub-6%). NNN retail along Kingston Pike and the Pellissippi Parkway corridor trades 6.5-7.5%. Knoxville is a yield-with-stability 1031 destination — not the growth story Nashville is, but cleaner entry economics and deeper operator pool than Memphis. Industrial along I-40 and I-75 trades 6.5-7.5% on small-bay flex.

Chattanooga

The underpriced surprise of TN — Volkswagen's Chattanooga plant, Amazon distribution, the Gig City fiber infrastructure (Chattanooga's EPB is one of the fastest municipal broadband networks in the country), and downtown Tennessee River revitalization have built a credible mid-market growth story. Class A multifamily 5.75-6.75%, industrial 6.0-7.5%. NNN retail along Highway 153 and Gunbarrel Road 6.5-7.5%. Smaller market than Nashville/Memphis, thinner broker depth, but better entry economics for patient capital.

Local counsel, recording, and filing in Tennessee

Tennessee is a deed-of-trust state with non-judicial foreclosure available — typically the fastest foreclosure timeline in the Southeast. Title insurance rates are not state-regulated. Recording is at the county level (95 counties); Davidson (Nashville), Shelby (Memphis), Knox (Knoxville), and Hamilton (Chattanooga) carry most institutional volume. TN imposes a Realty Transfer Tax at $0.37 per $100 of consideration (0.37%) plus a $1 per $1,000 mortgage tax — manageable but not trivial on large deals. Use TN counsel for entity structuring conversations — the F&E tax exposure for out-of-state-owned LLCs is the most common structural mistake by non-resident 1031 buyers.

Common mistakes in Tennessee 1031 exchanges

• Forgetting the TN Franchise & Excise Tax exposure on the holding entity. TN has no individual income tax, but the F&E tax applies to entities doing business in TN — including out-of-state LLCs holding TN real estate. A single-member LLC owned by a non-resident individual is disregarded for federal tax but can still owe TN F&E tax (6.5% excise on net earnings, 0.25% franchise on net worth or tangible property). Out-of-state buyers consistently structure into LLCs without modeling the F&E exposure, and the surprise tax bill arrives in the second year. Use a TN-aware entity structure or take the deduction on the federal return.
• Underwriting Nashville on 2021-2022 cap rates. Nashville Class A multifamily traded mid-4% caps at peak in 2021-2022 when cross-border 1031 capital was overwhelming local supply. Those cap rates are gone — the 2023-2024 supply wave widened spreads to 5.0-5.75% by 2025, and current stabilized A trades in the mid-5s. Buyers using 2021-2022 comps as the basis for 2026 underwriting will overpay. Use 2024-2025 trades as your cap rate band and model the supply digest into your rent assumptions.
• Treating Memphis as a multifamily play instead of an industrial play. Memphis's economic story is FedEx and logistics, not residential. Multifamily Class B/C in Memphis runs 6.5-8% caps reflecting softer demographic trends and the crime-narrative discount that institutional capital applies. The deep value in Memphis is industrial — credit-tenant logistics adjacent to FedEx World Hub, big-box distribution along I-40, I-55, and I-240. If you're 1031-ing into Memphis multifamily looking for the Nashville growth story, you'll be disappointed. Pivot to industrial.

What to do if you're starting a Tennessee-source 1031

1. Engage a Qualified Intermediary before the downleg closes. Your QI cannot be a disqualified person (attorney, CPA, or real estate agent who has represented you in the last two years).
2. Confirm state conformance and any clawback or withholding filings with a Tennessee-licensed CPA.
3. Identify replacement property within 45 days in writing, delivered to your QI, under the Three-Property Rule or one of the alternative identification rules.
4. Close on replacement within 180 days of the downleg closing or by your federal tax-return due date (with extensions), whichever is earlier.
5. File Form 8824 with your federal return reporting the exchange. File any required Tennessee state forms for the year, including any clawback or withholding-exemption filings.

FAQ: 1031 exchanges in Tennessee

Does Tennessee tax 1031 exchange gains at all for individual investors?

No state income tax. Tennessee has no individual income tax and no individual capital gains tax — federal 1031 mechanics are the entire game. The Hall Income Tax (the legacy 6% tax on interest and dividends) was repealed effective 2021, so there is no state-level recognition or reporting requirement on a 1031 for individuals.

How does the TN Franchise & Excise Tax affect my holding LLC?

If your holding LLC does business in TN (which holding TN real estate qualifies as), the F&E tax applies — 6.5% excise on net earnings plus 0.25% franchise tax on the greater of net worth or tangible property in TN. Even a single-member LLC owned by a non-resident individual that is disregarded for federal tax owes F&E at the entity level. There are exemptions (FONCE — Family-Owned Non-Corporate Entity, and similar) but they require careful structuring. Talk to a TN CPA before forming the entity, not after.

Why did Nashville cap rates compress so aggressively 2018-2024 and what should I underwrite now?

Cross-border 1031 capital from CA, NY, IL, and NJ chasing a no-income-tax destination with a credible job-growth story drove Class A multifamily to mid-4% caps by 2022. The 2023-2024 supply wave (~11,800 deliveries per year, nearly double the historical average) overshot, widening cap rates to 5.0-5.75% by late 2024. For 2026 underwriting use a mid-5% cap on stabilized Class A in core submarkets, model the remaining supply digest into rent growth (modest in 2026, recovering 2027+), and don't pay 2021-2022 prices.

Is Memphis still a credible industrial 1031 destination?

Yes — arguably the strongest in the Southeast. The FedEx World Hub at Memphis International is undergoing a $1B renovation through 2025, supplier networks have deepened around it, and industrial absorption has been among the deepest in the US for five years running. Credit-tenant industrial trades 5.5-6.75%, big-box 5.5-6.25%. The cap rate spread to Nashville on industrial product is 50-100 bps for similar credit quality, which is meaningful yield pickup if you're an industrial-focused 1031 buyer.

Does TN have any non-resident withholding on real estate sales at closing?

No. Tennessee has no non-resident withholding — closings have no income-tax-side withholding for individuals or entities. The only transactional tax is the Realty Transfer Tax at $0.37 per $100 of consideration (~0.37% of sale price) plus a small mortgage tax if financed. Both are typically paid by the seller at closing.

Can pre-2021 Hall Income Tax exposure still affect me?

Potentially, if you held interest- or dividend-paying investments and didn't file the Hall return for years through 2020. The standard TN statute of limitations is three years from filing or six years for substantial understatement, so most pre-2021 exposure is now closed. If you're a long-term TN resident who never filed Hall, talk to a TN CPA — voluntary disclosure programs sometimes apply.