LLC Rental Loans in Tennessee: Vesting and the Franchise-and-Excise Trap
Program and regulatory figures verified July 24, 2026. Details change; confirm your scenario with us.
Investors hold Tennessee rentals in LLCs for liability separation, and DSCR loans let title vest in the entity at closing. The catch nobody warns out-of-state buyers about is the franchise-and-excise tax that attaches the moment the LLC owns the property. This guide is educational; your CPA and a Tennessee attorney apply it to your facts.
Does my LLC owe Tennessee franchise and excise tax on rental property?
Yes, by default, and this is the trap the state's no-income-tax marketing hides. Any LLC that owns Tennessee rental real estate is doing business in the state, so it owes franchise and excise tax: 6.5% excise on net earnings (including gain on a sale) plus 0.25% franchise on net worth, with a $100 minimum. It does not matter where you formed the LLC; a Wyoming or Delaware LLC holding a Memphis rental still owes Tennessee F&E. Out-of-state investors form Tennessee LLCs blind to this constantly. The only common escape is the FONCE exemption below, and it must be claimed every year. This is a tax question, so confirm your situation with your CPA before you form the entity.
What is the FONCE exemption and does my rental LLC qualify?
FONCE is the Family-Owned Non-Corporate Entity exemption, and it is built for family rental LLCs. Two tests: at least 95% of the entity must be owned by relatives (first-cousin-or-closer, plus spouses and lineal descendants) or trusts for them, and at least 66.67% of activity must be passive investment income. Residential rent counts as passive, which is why the exemption suits landlords. Two limits disqualify: a residential property with more than four units at one location is not passive, and commercial rent above one-third of gross income fails the test. Your CPA confirms eligibility for your ownership and income mix.
Is the FONCE exemption automatic?
No, and this is where qualifying families lose it. FONCE requires Form FAE 183, filed initially and then renewed every single year by the 15th day of the fourth month after year-end. Miss the filing and a fully qualifying entity still gets assessed the tax. It is not a box you check once at formation; it is an annual obligation. Your CPA should calendar it with the rest of the entity's filings.
Did Tennessee repeal its franchise tax?
Only part of it. A 2024 law repealed the franchise-tax property measure for tax years ending on or after January 1, 2024, so the franchise tax is now computed on net worth alone rather than the greater of net worth or real-property value. Much of the web still says the franchise tax is based on your property's value; that died for 2024 and later years, and the related refund window has closed. The tax itself is alive. Confirm the current computation with your CPA.
Can I buy a Tennessee rental in an LLC at closing?
Yes on a DSCR or business-purpose loan: the LLC takes title at the table, with a personal guaranty behind the loan. Conventional Fannie and Freddie loans cannot close in an entity. The Tennessee twist: the day the LLC owns the property, its franchise-and-excise filing obligation begins, so factor the annual F&E return (or the FONCE application) into your carrying costs from day one. Vesting mechanics: how DSCR qualifying works.
Will transferring my rental into an LLC trigger the due-on-sale clause?
Usually not, on the loan side. Fannie Mae's Servicing Guide D1-4.1-02 treats a transfer to an LLC the borrower controls as an exempt transaction when the loan was acquired by Fannie on or after June 1, 2016, so due-on-sale is not enforced; Freddie Mac has a similar provision. But two Tennessee consequences ride along. If the property is a permitted Nashville non-owner-occupied STR, the transfer cancels that non-transferable permit even though the loan survives, the collision we detail on the Nashville page. And the LLC now owes F&E and must test FONCE family ownership. Have a Tennessee attorney paper the transfer and your CPA check the tax effect first.
Does a single-member LLC avoid Tennessee's franchise and excise tax?
Generally no. Tennessee treats LLCs, including single-member LLCs, as separate taxpayers for franchise and excise purposes even when they are disregarded federally, so the usual "I'll just use my normal single-member LLC" move does not dodge the tax. This is settled practice rather than a loophole. Your CPA should confirm how it applies to your specific structure before you assume the entity is exempt.
Does Tennessee allow series LLCs?
Yes. Tennessee's Revised LLC Act (T.C.A. §48-249-309) authorizes a series with separated liability if records are kept properly, and there is no separate Secretary of State filing per series; formation runs $50 per member, with a $300 minimum and $3,000 maximum. The open question is tax: whether each series files its own F&E return or claims its own FONCE exemption is a per-entity analysis, and we publish nothing quantitative about it here because it is unresolved. Lender acceptance of series vesting also varies by program. Structure any series with a Tennessee attorney and confirm the F&E treatment with your CPA before relying on it.
Tax and entity rules summarized here are educational, not advice; your CPA and a Tennessee attorney apply them to your facts.
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Frequently asked questions
Does my LLC owe Tennessee franchise and excise tax on rental property?
Yes by default: any LLC that owns Tennessee rental real estate is doing business here and owes 6.5% excise on net earnings plus 0.25% franchise on net worth ($100 minimum), even if the LLC was formed in Wyoming or Delaware. The main escape is the FONCE exemption, claimed annually. Confirm your situation with your CPA before forming the entity.
Is the FONCE exemption automatic?
No. FONCE requires Form FAE 183, filed initially and renewed every year by the 15th day of the fourth month after year-end. A fully qualifying family entity that skips the filing still gets assessed the tax. It is an annual obligation, not a one-time formation step. Have your CPA calendar it with the entity's other filings.
Does a single-member LLC avoid Tennessee's franchise and excise tax?
Generally no. Tennessee treats LLCs, including single-member LLCs, as separate franchise-and-excise taxpayers even when they are disregarded for federal tax, so a normal single-member LLC does not dodge the tax. This is settled practice. Confirm how it applies to your structure with your CPA before assuming the entity is exempt.
Will transferring my rental into an LLC trigger the due-on-sale clause?
Usually not: Fannie's Servicing Guide D1-4.1-02 exempts a transfer to a borrower-controlled LLC for loans acquired on or after June 1, 2016, and Freddie Mac is similar. But in Nashville that same transfer cancels a non-transferable STR permit, and the LLC then owes franchise-and-excise tax. Use a Tennessee attorney for the deed and your CPA for the tax.
Does Tennessee allow series LLCs?
Yes, under T.C.A. §48-249-309, with no separate state filing per series and formation at $50 per member ($300 minimum, $3,000 maximum). But whether each series files its own franchise-and-excise return or FONCE application is unresolved, so we state nothing quantitative about it, and lender acceptance of series vesting varies. Use a Tennessee attorney and your CPA.
Mike Certo · NMLS #260555 · Cornerstone First Mortgage NMLS #173855 · Equal Housing Lender. Educational content, not a loan commitment and not legal or tax advice. Tennessee franchise and excise tax, FONCE eligibility, property-tax classification, and city short-term-rental rules change and depend on your facts; confirm your situation with your CPA, a Tennessee attorney, and the city before you buy. Loans are subject to buyer and property qualification.