Tennessee Franchise and Excise Tax on a Rental Property LLC
Tennessee has no personal income tax on wages, which leads many out-of-state buyers to assume their rental income will go untaxed, but the state taxes most business entities directly through its franchise and excise tax. An LLC, limited partnership or corporation that owns rental property generally owes both taxes every year, regardless of how its income is treated on the members' federal returns, and that cost belongs in your underwriting before you make an offer.
The excise tax is 6.5 percent of the entity's net earnings, and it applies to rental income after expenses as well as to the gain when you sell the property. An LLC that earns $200,000 a year in net rental income owes about $13,000 in excise tax, and a $1 million gain on sale adds roughly $65,000 more in the year of the sale, which can change the exit math on a short hold.
Because the excise tax is based on net earnings, depreciation and interest generally reduce it the way they reduce federal taxable income, so a leveraged building in its early years may owe far less excise tax than the same building will owe once the debt is paid down. Bonus depreciation is the exception, because the state did not adopt the 2025 federal law's permanent 100 percent deduction and, under Department of Revenue guidance issued in December 2025, follows the older federal schedule that phases it down to 20 percent for 2026 and zero after that, so a cost segregation study saves far less here than on the federal return.
The franchise tax is 0.25 percent of the entity's net worth, with a minimum of $100. Before 2024 the tax was calculated on the greater of net worth or the value of property owned in the state, which made real estate entities pay on their full property value, but the legislature repealed that property measure for tax years ending on or after January 1, 2024. An entity with $1.5 million of net worth now owes about $3,750 a year.
The tax follows the entity rather than the people who own it, and pass-through treatment for federal purposes does not change that, so a two-member LLC taxed as a partnership pays the same excise and franchise tax as a corporation would. Individuals who hold title in their own names are generally outside the tax, but they give up the liability protection that the LLC was meant to provide, which is rarely a good trade on an apartment building.
A narrow exemption exists for family-owned noncorporate entities, but it rarely fits an apartment building, because family members must own at least 95 percent of the entity, at least two-thirds of its activity must produce passive investment income, and rent counts as passive only from residential property with no more than four units at one location. Qualification is decided year by year, with an application due by the 15th day of the fourth month after each tax year ends, and investor-held syndications with outside partners will not meet the ownership test.
Annual filing obligations add up on top of the tax, since the franchise and excise return is due by the 15th day of the fourth month after the tax year ends, and LLCs also owe the Secretary of State an annual report fee of $50 per member, with a minimum of $300 and a maximum of $3,000.
These costs rarely appear in an offering memorandum, because the seller's statements show operations at the property level and the tax sits at the entity level. A pro forma that compares a property here with one in a state without an entity tax can overstate the cash flow by thousands of dollars a year.
Add the excise tax on projected net income, the franchise tax on expected net worth and the annual report fee to your model as their own line items. Include the excise tax on your projected gain when you calculate exit proceeds. If the ownership group is entirely one family and the property has four or fewer units at one location, ask a tax professional who files in the state whether the family-owned exemption could apply, and file the application with the entity's first return after you close.
Those entity-level costs also change the comparison between markets, because a deal that looks stronger than one elsewhere on property-level numbers can fall behind once the entity's costs are counted. I help apartment buyers build CRE models that carry entity-level costs as their own line items, from annual operations through the projected sale. If you are comparing a deal here with one in another market, send both to amer@awadcapitaladvisors.com, and I can help you see how they stack up once every cost is in the model.