You're about to sell a house that's gone up a lot since you bought it, and somebody told you the tax bill is going to take a big bite out of it. Tennessee doesn't tax capital gains, so the only tax on a home sale here is federal. If it's the home you live in, federal law lets you exclude up to $250,000 of gain, or $500,000 for a married couple filing jointly.
I'm a Realtor, not a CPA. Below are the rules as the IRS publishes them, with an example in round numbers and the points where your CPA has to take over.
Does Tennessee have a capital gains tax?
No. As of October 2026, Tennessee has no state income tax on individuals, so there's no Tennessee tax on the gain when you sell your house. The Tennessee Department of Revenue says the state "has no state income tax on earned income," and the Hall income tax, which taxed interest and dividends, was repealed for tax years beginning on or after January 1, 2021.
That leaves the federal tax. There's one Tennessee exception worth a call to your CPA. If a corporation, LLC, limited partnership or business trust owns the property, the entity owes Tennessee franchise and excise tax, and the excise tax is based on its net earnings. If your rental sits in an LLC, ask your CPA how a sale shows up on that return.
How much is capital gains tax on a home sale in Tennessee?
The federal rate depends on how long you owned the house and on your taxable income. Own it more than one year and the gain is long-term, taxed at 0, 15 or 20 percent. Own it one year or less and the gain is short-term, taxed as ordinary income at your regular rates. Tennessee adds nothing on top.
For 2026, the IRS set the long-term brackets in Revenue Procedure 2025-32. They run on your total taxable income for the year, with the gain included.
| Filing status (2026) | 0% rate up to | 15% rate up to | 20% rate above |
|---|---|---|---|
| Single | $49,450 | $545,500 | $545,500 |
| Married filing jointly | $98,900 | $613,700 | $613,700 |
| Head of household | $66,200 | $579,600 | $579,600 |
| Married filing separately | $49,450 | $306,850 | $306,850 |
Rental property adds one more rate. The part of the gain that comes from depreciation (the IRS calls it unrecaptured section 1250 gain) is taxed at up to 25 percent.
On top of that sits the net investment income tax. As of October 2026 it's 3.8 percent once your modified adjusted gross income passes $200,000 single or head of household, $250,000 married filing jointly, or $125,000 married filing separately. Gains on real estate count as investment income. The part of a home sale gain you exclude doesn't count. Where your gain lands depends on everything else on your return that year, so your CPA runs the real number.
How much of the gain can I exclude when I sell my home?
Up to $250,000 if you're single and up to $500,000 if you're married filing jointly, as long as you owned the home and lived in it as your main home for at least two of the five years before the sale. That's the Section 121 home sale exclusion, and as of October 2026 it applies to a Tennessee home the same as one anywhere else in the country.
The two years don't have to be in a row, and the years you owned it and the years you lived in it don't have to be the same two years. Both just have to fall inside the five years before the sale. On a joint return, only one spouse has to meet the ownership test, but both have to meet the living test for the full $500,000. You generally can't use the exclusion if you used it on another home sale in the two years before this one. Your CPA confirms you qualify.
If you got a Form 1099-S at closing, you report the sale on your return even when the whole gain is excluded.
Selling before two years for work, health or an unforeseeable event
You may still get part of the exclusion if the main reason you sold early was a change in work location, a health issue or an unforeseeable event. For a work move, the new job has to be at least 50 miles farther from the home than the old one. IRS Publication 523 lists the qualifying events, and your CPA figures the partial amount.
Military and Foreign Service: the five-year clock can stop
If you or your spouse are in the uniformed services or the Foreign Service, work for the intelligence community, or serve with the Peace Corps, you can choose to suspend the five-year window while you're on qualified official extended duty. That means orders for more than 90 days or an indefinite period, at a duty station at least 50 miles from the home or living in government quarters under government orders. The suspension can run up to 10 years, on one property at a time.
This one's personal for me. I served in the U.S. Coast Guard from 1999 to 2003, and a PCS move is how a service member ends up owning a house they haven't lived in for three years. With the clock stopped, a home you lived in before your orders can still qualify. If you're weighing a sale after orders, read should you sell your home after PCS orders, and if you're thinking about keeping it as a rental, see using a VA loan for investment property in Tennessee. Then take your dates to your CPA.
How do I figure the gain on my house?
Your gain is the amount realized minus your adjusted basis. The amount realized is the sale price minus your selling expenses, like commission, advertising and legal fees. Adjusted basis starts with what you paid, adds certain closing costs from your purchase and the improvements you made, and subtracts any depreciation you claimed.
Improvements are work that adds value or extends the home's life, such as an addition, a new roof, a deck, central air, a fence or a kitchen modernization. Repairs and upkeep don't count, so painting, fixing leaks and replacing broken hardware stay out. Purchase closing costs that count include owner's title insurance, recording fees, survey fees, transfer taxes and legal fees for the title search and deed. Loan charges don't.
Example with round numbers, not a real client:
| Line | Amount |
|---|---|
| Sale price | $900,000 |
| Minus selling expenses (commission and fees) | $50,000 |
| Amount realized | $850,000 |
| Purchase price | $400,000 |
| Plus purchase closing costs that count toward basis | $3,000 |
| Plus improvements (roof, deck, kitchen) | $47,000 |
| Adjusted basis | $450,000 |
| Gain | $400,000 |
| Married filing jointly, lived there 2 of the last 5 years: excluded | $400,000 (limit $500,000) |
| Taxable gain, married filing jointly | $0 |
| Single, same facts: excluded | $250,000 |
| Taxable gain, single | $150,000 |
In this example the married couple owes no federal capital gains tax on the sale. The single seller has $150,000 of long-term gain, and if all of it fell in the 15 percent bracket, that's $22,500, before any net investment income tax. Keep the closing statement from your purchase and the receipts for every improvement, because they're what prove your basis. Your CPA does the final math.
Want me to run the sale side of this for your house? Text or call me at 615-392-1186.
Tax figures on this page are the federal rules as published for 2026 and are for planning only. I am a licensed Realtor (TREC 369038), not a tax professional or a lender. Confirm your own situation with a CPA, and any borrowing limit with your lender, before you rely on a number.
What if I inherited the house?
An inherited house usually starts with a stepped-up basis, meaning its fair market value on the date the owner died instead of what they paid for it. If you sell soon after for about that value, there's little or no gain to tax. The IRS also treats inherited property as held longer than one year, however long you've actually had it, so any gain gets the long-term rates.
Other values can apply, like an alternate valuation date the estate's personal representative chooses, so ask the estate's CPA or attorney which basis to use before you price the house. If you're handling a sale for family, my guide to selling an inherited home in Franklin walks through the rest of the process.
What about a rental or investment property?
A rental you never lived in doesn't get the home sale exclusion, because the exclusion only covers a home you owned and lived in as your main home for two of the five years before the sale. The gain on a rental is taxed at the long-term or short-term rates, the depreciation portion at up to 25 percent, and the 3.8 percent net investment income tax can apply on top. Your CPA should see the numbers before you list.
I've been on the landlord side of this myself. I bought my first home in Las Vegas at 24, and a year later I turned it into a rental instead of selling it, so I was a landlord at 25. I've been investing in real estate since 2005. Once a home becomes a rental, the tax rules on it change, and that's worth understanding before a tenant moves in.
Moved out and rented the old place? The time after you moved out, inside that five-year window, doesn't count against you, so if you lived there two of the five years before the sale you can generally still use the exclusion. The depreciation you took after May 6, 1997 can't be excluded and gets taxed separately. My guide on whether to sell or rent your house covers that decision, and your CPA covers the tax.
Deferring the gain with a 1031 exchange
A 1031 like-kind exchange lets you defer the gain when you sell real property held for business or investment and buy other like-kind real property. Your own main home doesn't qualify. You have 45 days after the sale to identify the replacement property, and you have to receive it by the 180th day or your tax return's due date with extensions, whichever comes first. If the sale money reaches you before you get the replacement property, the IRS can treat the deal as a sale instead of an exchange. Line up your CPA and an exchange facilitator before you list.
Spreading the gain with an installment sale or owner financing
An installment sale is a sale where you receive at least one payment after the tax year of the sale. Under the installment method, you can report part of the gain as each payment comes in. Any depreciation recapture income still gets reported in the year of sale.
Some people own their home free and clear and are looking at a big capital gains bill. For them we can look at owner financing, which, with their CPA involved, can spread that gain out instead of taking the whole hit in one year. If that's you, start with what seller financing is and how it works, run the payments in my seller finance calculator, and see the other ways to sell on my sell creatively page.
Tax figures on this page are the federal rules as published for 2026 and are for planning only. I am a licensed Realtor (TREC 369038), not a tax professional or a lender. Confirm your own situation with a CPA, and any borrowing limit with your lender, before you rely on a number.
Is there a capital gains calculator for a home sale?
My site doesn't have a capital gains tax calculator. Your federal tax depends on your whole return, so that number comes from your CPA. My two calculators handle the numbers around the tax.
The home sale calculator is a Tennessee seller net sheet. It takes the sale price and subtracts your payoffs, commission and concessions, the property tax proration, and the title and closing fees, so you see what you'd walk away with. It doesn't figure capital gains tax.
The home equity calculator shows your equity, your loan-to-value, what's left after selling costs and how much a lender might let you borrow against the house. It doesn't figure the tax either.
For the gain itself, fill in the example table above with your own closing statement and improvement receipts, or use the worksheets in IRS Publication 523, then hand it to your CPA. The sale price is the number I can help with. I'll pull real sold comps for free through my home evaluation.
Main home, inherited home or rental: how do the tax rules compare?
The rule that applies depends on how you used the house, and Tennessee adds no tax on the gain for an individual in any of the three cases.
| Main home | Inherited home | Rental or investment property | |
|---|---|---|---|
| Rule that applies | Section 121 exclusion: up to $250,000 single, $500,000 married filing jointly, after owning and living there 2 of the last 5 years | Stepped-up basis to fair market value on the date of death, in most cases | No home sale exclusion; a 1031 exchange can defer the gain and an installment sale can spread it |
| Starting basis | What you paid, plus qualifying closing costs and improvements | Fair market value on the date of death, in most cases | What you paid, plus improvements, minus depreciation |
| Main federal tax point | Gain above the exclusion taxed at 0, 15 or 20 percent | Always long-term, so 0, 15 or 20 percent on any gain | Depreciation portion up to 25 percent; 3.8 percent net investment income tax can apply |
| Tennessee tax on the gain | None for individuals | None for individuals | None for individuals; an LLC or other entity owner owes franchise and excise tax |
Tax figures on this page are the federal rules as published for 2026 and are for planning only. I am a licensed Realtor (TREC 369038), not a tax professional or a lender. Confirm your own situation with a CPA, and any borrowing limit with your lender, before you rely on a number.
Frequently asked questions about capital gains on a Tennessee home sale
Does Tennessee have a capital gains tax on real estate?
No. As of October 2026, Tennessee has no state income tax on individuals, so there's no Tennessee tax on the gain when you sell your house. The federal tax still applies, so confirm your numbers with a CPA.
Is the $500,000 exclusion automatic for married couples?
No. It takes a joint return where at least one spouse meets the ownership test, both spouses meet the living test, and neither used the exclusion on another home sale in the two years before. Otherwise the limit is $250,000. Your CPA confirms which one applies.
Do I have to report the sale if all of my gain is excluded?
Yes, if you got a Form 1099-S. You report the sale even when the whole gain is excluded, and you also report it if you can't exclude all of the gain. Your CPA handles the forms.
Can I deduct a loss when I sell my home?
No. A loss on property held for personal use, like your own home, isn't deductible, except for a casualty or theft loss. A loss on a rental is a separate question for your CPA.
What's my basis in a house I inherited?
Usually the fair market value on the date the owner died, not what they paid. Inherited property is also treated as held longer than one year, so any gain gets the long-term rates. Ask the estate's CPA or attorney which value to use.
Can I use a 1031 exchange on the home I live in?
No. Your own main home doesn't qualify. A 1031 exchange works only for real property held for business or investment, traded for other like-kind real property, with 45 days to identify the replacement and 180 days or your return's due date, whichever comes first, to receive it. Talk to your CPA before you list.
What should I do before I sell?
Get two numbers before you sign a listing agreement: what the house will sell for, and what your basis is. Your closing statement and receipts give you the basis, and I'll give you the price from real sold comps for free. Then sit down with your CPA and pick the way to sell that fits your tax picture, whether that's a regular sale, owner financing, or a 1031 exchange on a rental.
Text or call me at 615-392-1186.
Check out this article next
