Does Tennessee charge a state capital gains tax when you sell a rental property?

No. Tennessee has never levied a general individual income tax, and the Hall income tax on interest and dividends was repealed for tax periods beginning on or after January 1, 2021, per the Tennessee Department of Revenue. That leaves no state mechanism to tax a capital gain. An investor selling a rental in Shelby County or Fayette County, Tennessee owes federal tax on the sale and no state tax on the gain. Local property tax on the asset is separate and continues until the deed transfers.

What is depreciation recapture on a Memphis rental property?

Residential rental buildings are depreciated over 27.5 years, and the depreciation you claimed lowers your adjusted basis. When you sell, that portion of the gain is unrecaptured Section 1250 gain and is taxed at a federal rate of up to 25 percent, separately from the long-term capital gains rate applied to the rest of the gain. On a Shelby County, Tennessee rental held twelve years with an $80,000 depreciable building, roughly $34,909 of depreciation would be subject to that treatment. The 3.8 percent net investment income tax can apply on top for higher-income owners.

What are the 45-day and 180-day deadlines in a 1031 exchange?

You have 45 days from the transfer of the property you are selling to identify potential replacement properties in writing, signed and delivered to a qualified intermediary or another party to the exchange. You must receive the replacement property within 180 days of that transfer, or by the due date of your tax return including extensions, whichever comes first. Both are calendar-day counts. The exchange is reported to the IRS on Form 8824.

Does the jurisdiction of the replacement property change the numbers in a 1031 exchange?

Yes, substantially, and it is easy to miss inside a 45-day window. Tennessee assesses residential property at 25 percent of appraised value with rates quoted per $100 of assessed value. On a $250,000 house, 2026 rates produce about $3,302 a year inside Memphis, Tennessee, where the city and Shelby County rates stack, versus about $1,689 in unincorporated Shelby County, which pays the county rate only plus an annual county fire fee. That is roughly $1,613 a year of difference in operating expense on otherwise identical replacement properties.

Tax & Strategy · August 24, 2026

Tennessee Taxes Your Gain at Zero. The IRS Still Wants Its Depreciation Back.

Every Memphis investor knows the state has no income tax, and most of them let that fact do too much work. When you sell a rental you have owned for a decade, the entire bill is federal — and the largest line on it is usually not the appreciation you are proud of. It is the depreciation you already spent.

What Tennessee actually takes: nothing

Start with the good news, because it is real and it is a genuine structural advantage of owning here. Tennessee has never had a general individual income tax. The one narrow slice of investment income the state did tax — the Hall income tax on interest and dividends — was phased down and then repealed for tax periods beginning on or after January 1, 2021, per the Tennessee Department of Revenue. There is no remaining state mechanism that reaches a capital gain.

An investor in a state with an income tax can lose several more percentage points of the same sale to their state. A seller in Shelby County or Fayette County, Tennessee does not. That gap is exactly why so much out-of-state capital keeps landing in this market, and why a 1031 exchange into Memphis often looks better on the back end than an exchange into somewhere that taxes the eventual exit twice.

But zero state tax is not zero tax, and the difference is where owners get surprised.

The federal bill, on a real set of numbers

Take a straightforward, illustrative case — the arithmetic, not a market claim. You bought a rental house in Memphis, Tennessee in 2014 for $95,000, allocating $15,000 to land and $80,000 to the building. Residential rental improvements depreciate over 27.5 years, so you have been writing off about $2,909 a year. Twelve years in, that is roughly $34,909 of accumulated depreciation, and your adjusted basis has fallen from $95,000 to about $60,091.

Now you sell, netting $185,000 after costs. Your total gain is not $90,000. It is about $124,909, because the depreciation you took came straight out of basis.

That gain splits in two for federal purposes. The $34,909 of depreciation is unrecaptured Section 1250 gain, taxed at a rate of up to 25% — call it about $8,727. The remaining $90,000 is long-term capital gain; at a 15% rate that is $13,500. Together, roughly $22,227 in federal tax, before the 3.8% net investment income tax that can apply to higher-income owners. Tennessee's share of that is zero, and the total is still more than a fifth of the appreciation.

"Depreciation is not a gift. It is a loan the IRS makes you against the future sale of the building, and the balloon payment comes due on the closing statement."

The 45-day clock is the whole game

Section 1031 lets you defer that bill by rolling the proceeds into replacement real property. The mechanics survived the most recent round of federal tax legislation intact: the One Big Beautiful Bill Act did not change 1031 exchange treatment, which remains as the Tax Cuts and Jobs Act left it — real property only, no equipment, no vehicles.

What has not softened is the timing. Per the IRS instructions for Form 8824, you must identify replacement property within 45 days after transferring the property you gave up, and you must receive the replacement within 180 days of that transfer or by the due date of your return including extensions — whichever comes first. That second clause catches people who sell late in the year and assume they have a full 180 days. The identification has to be in writing, signed by you, and delivered to a party in the exchange such as the qualified intermediary or the seller of the replacement property. These are statutory calendar-day counts, not guidelines, and the IRS has no general authority to extend them.

Forty-five days is not long in a market where good rental inventory moves. That is the practical argument for lining up the replacement side before you list the relinquished property — not after — and it is the same "deals are the bottleneck" problem we have written about in a tight Memphis buying market.

Where you land changes the deal you traded into

Here is the local mistake, and it is an expensive one to make under time pressure: two replacement houses at the same price are not the same investment in this county. Tennessee assesses residential property at 25% of appraised value, with rates quoted per $100 of assessed value. On a $250,000 house — $62,500 of assessed value — the 2026 rates work out like this:

Inside Memphis, Tennessee, the city rate of 2.58081 stacks on the Shelby County rate of 2.702382, for about $3,302 a year. In unincorporated Shelby County there is no city rate at all — just the county's 2.702382, about $1,689, plus an annual county fire fee tiered by structure square footage. That is roughly $1,613 a year of difference in a fixed operating expense, which we broke down house-by-house in the city-line tax post. In Germantown, TN the stacked rate lands near $2,803; in Collierville about $2,701; in Arlington and Lakeland in northeast Shelby County, roughly $2,395 and $2,276. Shelby County bills are due the first Monday of October, payable through the last day of February, and delinquent March 1 with 1.5% interest on base tax accruing monthly.

Deferring $22,000 of federal tax and then absorbing $1,600 a year of extra property tax you did not underwrite gives back a meaningful share of the benefit inside a decade. The exchange decision and the jurisdiction decision are one decision.

Financing the replacement side

The debt on the new property has to work too, and money is not cheap. Freddie Mac's Primary Mortgage Market Survey release dated August 20, 2026 put the 30-year fixed at 6.65%, down from 6.67% the prior week and the second consecutive weekly decline, with the 15-year at 5.95%. That benchmark describes well-qualified, owner-occupied purchase borrowers putting 20% down. Investor financing prices above it on both the down payment and the rate, so build your replacement-property model off a quote you actually have, not off the headline number.

One more structural point: a 1031 defers, it does not erase. The deferred gain and the depreciation you recaptured-in-waiting follow you into the replacement property's basis, which means the next building starts with a smaller depreciable base than its purchase price suggests. Investors who intend to hold indefinitely treat that as a feature. Investors who plan to cash out in five years should run the numbers both ways before committing to the clock.

Disclosure: this is the property management side of the business, and Matt is separately a licensed REALTOR® with Reid Realtors, LLC. If you buy or sell a property through him — including either leg of an exchange — he is paid a commission on that transaction in addition to any management fee. You are never required to use both.

Before you start the clock

Talk to a CPA about your specific basis and holding period before you list anything; the numbers above are illustrative arithmetic, not tax advice, and the recapture rate that applies to you depends on facts we cannot see. What our team can tell you is the operating side: what a candidate replacement property should rent for, what its jurisdiction will cost you every year, and what condition issues will show up in year one. That is the information the 45-day window rarely leaves time to gather from scratch. Management fees never exceed 10% of monthly rent, with a customized schedule as your portfolio grows and no hidden charges, and tenant screening is paid by the applicant — the full breakdown is in our fee guide. If you are still deciding whether to sell at all, start with the return-on-equity test. Get a free rent analysis and we will price the replacement side with you.

Sources & further reading: Tennessee Department of Revenue — HIT-3, Hall Income Tax Repealed Beginning January 1, 2021, IRS — Instructions for Form 8824, Like-Kind Exchanges, IRS — Like-Kind Exchanges, Real Estate Tax Tips, KLR — 1031 Exchanges in 2026: What's Changed and What Investors Should Know (March 3, 2026), Shelby County Trustee — Shelby County Tax Rates, Shelby County Trustee — Payment Deadlines, Freddie Mac Primary Mortgage Market Survey, release dated August 20, 2026. Shelby County 2026 property tax rates verified August 2026. Tax and statutory details are summarized as of August 2026 and may change; this article is general information, not tax or legal advice. Consult a CPA or a Tennessee attorney about a specific property or transaction.