Tennessee
Reviewed July 2026Federal §453 conformity
Tennessee has no individual income tax — the old Hall tax on interest and dividends is long repealed, so both the gain and the note's interest arrive tax-free at the individual level. The surprise waits at the entity: Tennessee taxes LLCs and limited partnerships themselves, unusual among states, with a 6.5% excise tax on the entity's net earnings — including gain when the entity sells its assets — plus a franchise tax on its net worth. An individual selling stock or membership interests personally owes Tennessee nothing; an LLC selling its assets may owe real money unless an exemption applies.
Nonresident sourcing
Tennessee makes no individual income tax claim on installment payments, resident or not, and the inbound caution applies as everywhere. The entity rule cuts for nonresidents too: an LLC doing business in Tennessee owes F&E on its gain no matter where its members live.
Withholding
Tennessee imposes no withholding on installment payments. A source state's closing-table regime applies regardless of the seller's Tennessee address; the entity's obligation is its own F&E filing each year it recognizes gain.
Selling, then moving (residency change)
Establishing Tennessee residency stops a former state from taxing the seller as a resident, but it does not strip that state's claim on gain from property or a business located there. The move helps most when made — and documented — before the sale.
Pass-through entity (PTE) tax election
There is no PTE election because there is no individual income tax to work around — and Tennessee's entity-level F&E taxes are mandatory, not elective, with the federal deduction that entity-level taxes carry.
Estate and IRD
Tennessee imposes no estate or inheritance tax. At death the federal rules apply — heirs pay income tax as payments arrive — with no state layer, and Tennessee's community property trust (another of the elective regimes) offers married couples the pre-sale basis play available in Alaska and South Dakota.
Planning notes
Tennessee planning is entity triage. First: does the deal run gain through an LLC or limited partnership with Tennessee activity? If so, the 6.5% excise is the number to beat. Second: does an exemption apply? The family-owned exemption for entities holding passive investments — the FONCE — shelters exactly the kind of family LLC that holds farmland or rental property, and holding the note inside a qualifying FONCE can keep the whole stream outside the excise. Qualification has strict income and ownership tests; check them before closing, because the structure that qualifies is rarely the one improvised afterward.
Unusually among states, Tennessee's excise tax reaches LLCs and limited partnerships at 6.5% on the entity's net earnings — including gain from an entity-level asset sale — even though the members owe no individual income tax. Selling interests personally avoids it; selling assets through the entity does not.
Family-owned entities earning at least two-thirds of their income from passive investments or farming can be exempt from the F&E taxes entirely. Qualification is tested year by year — and a sale year's income mix can break it precisely when the stakes peak. Confirm FONCE status before closing, not at filing time.
Educational information, current as of the July 2026 review. State law changes; confirm treatment with a qualified advisor before structuring a transaction.
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