Taxes on Selling a House in Tennessee: Capital Gains and Transfer Tax

Selling a house in Tennessee comes with a lighter tax load than in most states, because Tennessee has no state income tax and does not tax capital gains at the state level. The taxes on selling a house in Tennessee that you do need to plan for are federal: capital gains tax on your profit, possible net investment income tax if your income is high, and depreciation recapture if you ever rented the place out. At closing you’ll also see the state transfer tax, prorated property taxes, and recording fees pulled from your proceeds. Most people selling a primary residence walk away owing nothing in federal tax thanks to the Section 121 exclusion.

Federal Capital Gains Tax on Your Profit

The IRS taxes the profit from your sale, not the sale price itself. Profit is the difference between what you sell for and your adjusted basis (roughly, what you paid plus qualifying improvements, minus any depreciation you claimed). The rate depends on how long you owned the home.

Own it for one year or less and the gain is taxed as ordinary income. For 2026, ordinary rates run from 10% to 37%, with the top bracket starting at $640,600 for single filers and $768,700 for married couples filing jointly.¹ Short holds are unusual for a primary residence but common for flippers.

Own it for more than a year and the gain qualifies for long-term capital gains rates of 0%, 15%, or 20%, based on your taxable income.² For 2026, a single filer pays 0% on long-term gains up to $49,450 of taxable income, 15% up to $545,500, and 20% above that. Married couples filing jointly get 0% up to $98,900 and 15% up to $613,700.

The Section 121 Exclusion Most Sellers Rely On

If the house was your primary residence, you can exclude up to $250,000 of gain as a single filer, or up to $500,000 as a married couple filing jointly.³ To qualify, you must have owned and lived in the home as your main residence for at least two of the five years before the sale. The two years don’t need to be consecutive.

For couples claiming the full $500,000, both spouses have to meet the two-year use test, though only one needs to meet the ownership test. Neither spouse can have used the exclusion on another sale in the prior two years.⁴

Fall short of the two-year requirement and you may still get a partial exclusion if the sale was driven by a job move, a health issue, or an unforeseen circumstance.³ The IRS reads “unforeseen circumstances” broadly: divorce, job loss, inability to pay basic living expenses after an employment change, multiple births from the same pregnancy, destruction of the home, or a casualty from a disaster.⁵ The partial exclusion is prorated based on how much of the two-year period you actually met.

How to Calculate Your Taxable Gain

The gain is not sale price minus purchase price. Two adjustments cut it down.

Your adjusted basis is what you paid for the home plus the cost of capital improvements. An improvement is anything that adds value, extends the home’s life, or adapts it to a new use: a new roof, a kitchen renovation, a bathroom addition, landscaping, new siding. Routine maintenance and small repairs generally don’t count unless they were part of a larger remodel.⁵ Keep receipts. The gap between a $50,000 gain and a $150,000 gain often comes down to whether you saved the paperwork.

Selling expenses come off the amount you realized on the sale. Real estate commissions, advertising, legal fees, and loan charges you paid on the buyer’s behalf all qualify.⁵ Commissions alone can knock tens of thousands off your taxable gain on a typical Tennessee sale.

Net Investment Income Tax for Higher Earners

An extra 3.8% federal tax can stack on top of the capital gains rate. The net investment income tax applies to gains from real estate sales when your modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.⁶ It’s calculated on the lesser of your net investment income or the amount your income exceeds the threshold.⁷

A married couple with a taxable portion of gain and total income well above $250,000 could owe 20% in capital gains plus 3.8% NIIT, for an effective 23.8% federal rate. The thresholds are not indexed for inflation, so more sellers cross them each year. This is the tax most people forget to plan for.

Depreciation Recapture If You Rented Any Part of the Home

Claimed depreciation because you used the house as a rental, ran a home office, or otherwise put part of it to business use? The IRS claws back some of that benefit at sale. The portion of your gain attributable to depreciation is taxed at up to 25%, regardless of your income.² This “unrecaptured Section 1250 gain” applies even when Section 121 covers the rest of your gain. Depreciate $40,000 over years of renting, and you can owe up to $10,000 on that slice alone.

Tennessee’s Transfer Tax

Tennessee charges a transfer tax of $0.37 per $100 of the sale price or fair market value, whichever is higher, on any real property that changes hands.⁸ On a $350,000 sale that’s $1,295. The register of deeds will not record the deed until the tax is paid.⁹

Under Tennessee law, the buyer is legally responsible for the transfer tax.⁹ In practice the sales contract can shift it, and sellers sometimes agree to cover it as a concession. A separate indebtedness tax at the same $0.37 per $100 rate hits mortgages and other debt instruments recorded against the property; the borrower pays that one.

Common Transfer Tax Exemptions

Several categories of transfer skip the tax:

Deeds between spouses, including those creating or dissolving a tenancy by the entirety.
Transfers adjusting property rights between divorcing parties.
Moves of property into or out of a revocable living trust you created.
Deeds executed by an executor or trustee to distribute property to beneficiaries under a will or trust.
Transfers made as part of a merger, consolidation, or sale of substantially all assets under a reorganization plan.

Leasehold transfers are also exempt.⁸

Property Tax Prorations at Closing

Tennessee assesses property taxes as of January 1 each year. The bill becomes due the first Monday in October and is delinquent March 1 of the following year.¹⁰ Because the bill covers the whole calendar year and lands late in it, buyer and seller split the cost at closing based on how many days each owned the home.

Close in July and you cover roughly half the year. The closing agent uses the current tax bill if it’s out, or an estimate from the prior year’s assessment if it isn’t. If you’ve already paid the full year, the buyer credits you for their share. If the bill hasn’t been issued yet, you credit the buyer and they pay it when it comes due.

Recording Fees and Title Costs

Tennessee recording fees are set by statute. A standard document like a warranty deed costs $10 for the first two pages and $5 for each additional page, with a $2 per-instrument processing fee, and counties accepting electronic filings may add a $2 e-filing fee.¹¹ A three- or four-page deed usually runs $17 to $22.

Title costs are the bigger line. A title search runs $150 to $500. Title insurance for the buyer typically runs $1,000 to $3,000 depending on property value. Who pays for the owner’s policy depends on local custom and the contract.

Selling an Inherited Home

Inherited property gets a “stepped-up basis” equal to its fair market value on the date of the previous owner’s death.¹² If a parent bought the house in 1985 for $60,000 and it was worth $350,000 when they died, your basis is $350,000. Sell for $360,000 and your taxable gain is only $10,000.

The IRS also treats inherited property as long-term regardless of how long you’ve held it, so the lower long-term capital gains rates apply automatically. Tennessee has no inheritance tax or estate tax, so the state side is clean. Heirs who sell soon after inheriting often owe nothing or nearly nothing.

1031 Exchanges for Investment Properties

Selling a rental or other investment property? A 1031 exchange lets you defer all capital gains taxes by rolling the proceeds into another investment property. The replacement has to be “like kind,” which for real estate means any other real property held for investment or business use.¹³ Sell a Knoxville duplex, buy a Chattanooga retail building.

The deadlines are strict. You have 45 calendar days from closing on the sale to identify potential replacements in writing, and 180 calendar days to complete the purchase. Neither window extends for weekends or holidays.¹³ Miss either by a day and the full gain becomes taxable.

You also cannot touch the sale proceeds. A qualified intermediary has to hold the funds from closing until the replacement purchase is complete, and you can’t act as your own.¹⁴ Taking control of the cash even briefly disqualifies the exchange.

A 1031 is for investment or business property. It doesn’t apply to your primary residence.

FIRPTA Withholding for Foreign Sellers

If you’re a foreign national selling U.S. real property, the buyer generally must withhold 15% of the sale price and remit it to the IRS under the Foreign Investment in Real Property Tax Act.¹⁵ On a $400,000 home that’s $60,000 held back at closing.

Two exceptions narrow it. Sales at $300,000 or less where the buyer plans to use the home as a personal residence trigger no withholding. Sales between $300,000 and $1,000,000 with the buyer using it as a residence may qualify for reduced withholding.¹⁵ Foreign sellers whose actual tax will be less than 15% can apply for a withholding certificate on Form 8288-B before closing.¹⁶

Reporting the Sale

If your gain exceeds the Section 121 limits, or the exclusion doesn’t apply, report the sale on Form 8949 and Schedule D of your federal return.¹⁷ Even a fully excluded sale may still need reporting if the closing agent issues a Form 1099-S. You can avoid the 1099-S by certifying to the closing agent that the sale qualifies for full exclusion, but only if you’re sure you meet every requirement.

Because Tennessee has no state income tax, there’s nothing to file on the state side for the gain itself.¹⁸ Federally, failing to report a taxable sale can bring penalties and interest on top of the tax. Keep purchase records, improvement receipts, and closing documents for at least three years after filing the return that includes the sale, longer if depreciation was involved or you plan to roll gains into a future transaction.

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
2
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
3
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
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eCFR. 26 CFR 1.121-2 – Limitations
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Internal Revenue Service. Publication 523, Selling Your Home
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Internal Revenue Service. Topic No. 559, Net Investment Income Tax
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Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
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Justia Law. Tennessee Code 67-4-409 – Recordation Tax
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Tennessee Department of Revenue. Recordation Tax Manual
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Tennessee Comptroller of the Treasury. Assessment Schedule
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Justia Law. Tennessee Code 8-21-1001 – Registers
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Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
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Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
14
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
15
Internal Revenue Service. FIRPTA Withholding
16
Internal Revenue Service. About Form 8288-B
17
Internal Revenue Service. Instructions for Form 8949
18
Tennessee Department of Revenue. GEN-34 – Income Tax Withholding