1031 Exchange & DST Investing in Tennessee
Tennessee imposes no state income tax on capital gains, so real estate gains face only federal tax, which a 1031 exchange defers. Nashville, Memphis, and the Chattanooga-Knoxville corridor draw strong 1031 replacement demand.
State tax treatment of a 1031 exchange
Tennessee does not levy a state individual income tax on wages or capital gains; its former tax on interest and dividends, the Hall tax, was fully repealed. As a result, there is no state-level capital gains tax on the sale of investment real estate in Tennessee.
A federal 1031 exchange defers the federal capital gains and depreciation recapture tax, and because Tennessee has no income tax, no additional state deferral analysis is required. Gains recognized in a future taxable sale would still face only federal tax at the Tennessee level.
Market snapshot
Tennessee's investment markets are led by Nashville, Memphis, Knoxville, and Chattanooga. Nashville's rapid population and job growth across healthcare, music, and corporate relocations has made it one of the strongest multifamily and mixed-use markets in the country, while Memphis is a premier national logistics and distribution hub.
Multifamily, industrial and logistics, and hospitality assets lead investor demand. No state income tax, strong in-migration, and Memphis's central distribution role make Tennessee a leading destination for 1031 replacement capital.
Why 1031 & DST investors look here
- No Tennessee state income tax means capital gains face federal tax only.
- Nashville's growth and Memphis's logistics dominance support strong, diversified demand.
- A deep multifamily and industrial market gives investors ample replacement options.
Replacement-property options
Tennessee investors can exchange into Delaware Statutory Trust (DST) interests for passive ownership, use a 721 exchange to move into an UPREIT structure, or invest gains through Qualified Opportunity Zone funds. Replacement property need not be located in Tennessee; a DST can hold real estate in multiple states, allowing investors to diversify while satisfying the like-kind requirement.
Frequently asked questions
Does Tennessee tax a 1031 exchange?
No. Tennessee has no state income tax on capital gains, so real estate gains face only federal tax, which a 1031 exchange defers.
Can I exchange Tennessee property for out-of-state DSTs?
Yes. Replacement property does not have to be in Tennessee, and DST interests holding out-of-state real estate can qualify as like-kind.
Do I still need a qualified intermediary in Tennessee?
Yes. A 1031 exchange is governed by federal law, so a qualified intermediary and the federal deadlines apply regardless of Tennessee's lack of income tax.
Gerald F. “Jerry” Baker, III — Founder & Managing Principal, Baker 1031 Investments · FINRA Series 22 / 63 · SIE. Read full bio →
State tax treatment is general and changes frequently; this page is educational and is not tax, legal, or investment advice. Confirm current state and local rules with your own CPA and attorney. Securities offered through Aurora Securities, member FINRA/SIPC. Real estate investments involve risk, including possible loss of principal.