Tennessee’s rental tax rules put four layers on a rental property: a 7% state sales tax on short-term stays, a local occupancy tax collected by your county or city, annual property tax, and federal income tax on what you earn. Tennessee does not tax rental income at the state level, which is a real advantage over most other states, but every other layer still applies. Which ones you deal with month to month depends on how long guests stay, whether you book through a platform, and whether the property is yours or someone else’s.
State Sales Tax on Short-Term Rentals
Tennessee charges 7% state sales tax on rooms, lodgings, and accommodations rented for fewer than 90 continuous days.1Justia. Tennessee Code 67-6-202 – Property Sold at Retail That covers vacation rentals, cabins, condos, and any other dwelling where guests stay less than three months. The tax applies to the full amount the guest pays, including cleaning fees, service charges, and any other mandatory costs built into the price.2Tennessee Department of Revenue. SUT-115 – Services Subject to Sales and Use Tax
If you rent through a large online booking platform, the platform almost certainly handles the 7% collection and remittance for you. Tennessee law treats marketplace facilitators as the seller for sales tax purposes, which puts them on the hook for the tax on transactions they facilitate.3FindLaw. Tennessee Code 67-6-601 – Certificate of Registration If you book guests directly through your own website or by word of mouth, you need to register as a dealer with the Tennessee Department of Revenue and collect the 7% yourself.
When Sales Tax Stops: The 90-Day Rule
When the same person rents your property for 90 or more continuous days, state sales tax drops off entirely. That is the dividing line between a short-term rental subject to sales tax and a longer arrangement that is not. The key word is “continuous.” Different individuals can stay in the unit during the 90-day window as long as the same person is paying, but if the reservation gets cancelled, the clock resets.4Tennessee Department of Revenue. Taxation of Short-Term Rental Units
If you collected sales tax during the first 89 days and the guest stays past day 90, stop collecting as of day 90. Some owners refund the previously collected tax for that guest. Getting this right matters, because overcharging creates its own problems with refund requests and complaints to the Department of Revenue.
Local Occupancy Tax
On top of the state’s 7%, nearly every county and municipality in Tennessee levies its own occupancy tax on overnight stays. These are separate from sales tax, collected under a different legal framework, and often deposited into local tourism promotion funds.5Justia. Tennessee Code 67-4-1401 – Part Definitions Local rates vary by jurisdiction but generally run 2% to 5%, with a statutory cap that keeps combined local occupancy tax in an incorporated area from exceeding 8%.
The occupancy tax threshold is different from the sales tax threshold. For local occupancy tax, a “transient” is someone staying fewer than 30 continuous days.6Justia. Tennessee Code 67-4-1401 – Part Definitions Once a guest hits 30 continuous days, local occupancy tax stops for the rest of that stay. So a guest staying 45 days avoids local occupancy tax after day 30 but still pays state sales tax until day 90.
Platforms that handle state sales tax do not always collect local occupancy tax. Some jurisdictions have separate agreements with platforms; others require you to collect and remit locally no matter what the platform does. Check with your county or municipal clerk’s office to find out what applies in your area. This is one of the most common compliance failures for new short-term rental owners.
Property Tax on the Rental
Every rental property in Tennessee is subject to county property tax, assessed annually based on appraised value. Classification matters a lot for how much you pay. Residential property is assessed at 25% of appraised value, while commercial and industrial property is assessed at 40%.7Tennessee Comptroller of the Treasury. How to Calculate Your Tax Bill A home appraised at $300,000 would have an assessed value of $75,000 at the residential rate but $120,000 at the commercial rate. Your local tax rate then applies to that assessed value.
Whether a short-term rental is classified residential or commercial depends on your county assessor’s interpretation and local rules. Some counties reclassify properties used primarily as vacation rentals to commercial, which pushes the assessment percentage from 25% to 40%. That single change can increase your property tax bill by 60%. If you receive a notice of reclassification you disagree with, you can appeal to your county board of equalization.
Owners who furnish rental units also face tangible personal property tax. Furniture, appliances, and equipment used in a rental business are taxable personal property that must be reported annually on a Schedule B filing with your county property assessor. This hits short-term rentals especially hard because the owner typically provides beds, kitchen equipment, and electronics.
Federal Income Tax on What You Earn
Tennessee does not have a state income tax on wages, salaries, or rental income, and that applies to both short-term and long-term rentals. The IRS still wants its share, though. All rental income gets reported on Schedule E of your federal return, where you also list deductible expenses like mortgage interest, insurance, repairs, property management fees, and advertising costs.8Internal Revenue Service. About Schedule E (Form 1040), Supplemental Income and Loss
The 14-Day Rule
If you rent your home for fewer than 15 days during the year and also use it personally, you don’t report any of the rental income and can’t deduct any rental expenses.9Internal Revenue Service. Renting Residential and Vacation Property For Tennessee owners near Nashville during CMA Fest or similar events, this can be useful if you only rent occasionally.
Depreciation
Residential rental buildings are depreciated over 27.5 years using the straight-line method.10Internal Revenue Service. Publication 527, Residential Rental Property Divide the building’s cost (not including land) by 27.5 to get your annual depreciation deduction. This is a non-cash deduction that cuts your taxable rental income each year. Capital improvements like a new roof or HVAC system get their own separate depreciation schedules.
One thing owners overlook: when you eventually sell, the IRS recaptures all the depreciation you took, or could have taken even if you forgot to claim it, and taxes it at up to 25%. Skipping depreciation deductions doesn’t protect you from recapture at sale, so there’s no benefit to leaving the deduction on the table.
Passive Activity Loss Limits
Rental real estate is treated as a passive activity for federal tax purposes. If rental expenses exceed rental income, you can deduct up to $25,000 of that loss against other income, as long as you actively participate in managing the property and your modified adjusted gross income is $100,000 or less.11Internal Revenue Service. Instructions for Form 8582, Passive Activity Loss Limitations The $25,000 allowance phases out between $100,000 and $150,000 of modified AGI. Above $150,000, you generally cannot deduct passive rental losses against wages or other active income, though the losses carry forward to future years.
Business Tax: Most Individual Owners Are Exempt
Tennessee’s business tax is a gross-receipts tax, but individuals who rent out real property they personally own are generally exempt. The business tax does apply to property management companies that rent out properties belonging to other people, which fall under Classification 3 at a retail tax rate of three-sixteenths of one percent of gross sales.12Justia. Tennessee Code 67-4-709 – Tax Rates Even for businesses that are subject to it, the Tennessee Works Tax Act eliminated the filing requirement for any business grossing less than $100,000 per year within a single county or city.13Tennessee Department of Revenue. Small Businesses No Longer Have to File Business Tax
Registering and Filing
If you collect state sales tax yourself rather than relying on a marketplace facilitator, register as a dealer with the Department of Revenue.3FindLaw. Tennessee Code 67-6-601 – Certificate of Registration Registration happens through the Tennessee Taxpayer Access Point (TNTAP), which is also where you file returns and make payments.14Tennessee Department of Revenue. Tennessee Taxpayer Access Point You’ll need your Social Security Number or Employer Identification Number, the physical address of each rental property, and your legal business name. Accurately identifying your start date of business activity prevents the Department of Revenue from assessing penalties retroactively for periods before you actually began renting.
Most short-term rental owners file sales tax returns monthly, with each return due by the 20th of the following month.15Tennessee Department of Revenue. Due Dates and Tax Rates Lower-volume filers may qualify for quarterly returns (due January 20, April 20, July 20, and October 20) or annual returns (due January 20). Your filing frequency is assigned during registration based on expected tax liability.
Late payments carry a penalty of 5% of the unpaid tax for each month or partial month the payment is delinquent, up to a maximum of 25%.16Tennessee Department of Revenue. GEN-16 – Penalties and Interest Interest accrues on top of penalties. A single missed filing snowballs quickly if you let it sit, so a calendar reminder for the 20th of each month is worth the two minutes it takes.