Tennessee Investment Property: Entity Structuring, FONCE, and the 2024 Franchise Tax Shift

Tennessee's reputation as a tax-friendly state for real estate investors is largely accurate—but the details require careful navigation. The complete absence of state income tax on individual rental income is real. What's less understood is how that interacts with entity-level taxes, the 2024 franchise tax overhaul, and the specialized trust structures the state uniquely offers for asset protection.

If you're acquiring Tennessee investment property in an LLC or holding entity, three legal frameworks materially affect your cost structure: the Franchise and Excise tax, the FONCE exemption, and the Obligated Member Entity election. Each has been updated recently enough that information from even two or three years ago may be wrong.

The 2024 Franchise Tax Change

Before 2024, Tennessee imposed a Franchise tax on limited liability entities that used an unusual calculation method: the tax applied to the greater of the entity's net worth or the book value of real and tangible property owned in Tennessee. This "Schedule G" alternative minimum property measure penalized real estate holding companies heavily, because they held high book-value assets even when operating at thin margins or net losses.

In 2024 (Public Chapter 950), the Tennessee General Assembly repealed Schedule G entirely. Effective for all tax years ending on or after January 1, 2024, the Franchise tax is calculated solely based on net worth at a rate of 0.25%—with a $100 floor. The Schedule G property measure is gone.

For a real estate LLC holding $2,000,000 in Tennessee property at low book value with modest net earnings, this change can eliminate tens of thousands of dollars in annual tax liability that previously existed under the property measure. Portfolio landlords, real estate syndications, and out-of-state investors holding heavily depreciated but high-book-value assets are the primary beneficiaries.

The Excise tax—6.5% of Tennessee taxable net earnings—remains active. But for holding entities structured to maximize eligible exemptions, the practical Excise tax burden can also be eliminated.

The FONCE Exemption

The Family-Owned Non-Corporate Entity (FONCE) exemption is one of the most valuable tools available to Tennessee real estate families. Under T.C.A. § 67-4-2008, an LLC or limited partnership is fully exempt from both Franchise and Excise taxes if:

1. At least 95% of the ownership is held by recognized family members—lineal descendants, spouses, and legally adopted children
2. At least 66.67% of the entity's income derives from passive investment activity, which explicitly includes rental income

Filing Form FAE 183 with the Tennessee Department of Revenue establishes the exemption. For multi-generational families holding rental portfolios—or spouses who co-own rental property in an LLC—this is a straightforward path to complete F&E tax elimination. It's also one of the most under-utilized structures because it requires knowing the exemption exists in the first place.

The Obligated Member Entity (OME) Election

The Obligated Member Entity exemption is a more aggressive structure. Under T.C.A. § 67-4-2008(a)(9), an LLC can be fully exempt from F&E taxes if all members formally execute a written agreement to be personally liable for the entity's debts and obligations.

This requires two steps: filing Form FAE 183 and amending the LLC's Articles of Organization to explicitly state the members' assumption of liability.

The tradeoff is significant. The OME election intentionally pierces the corporate veil—members lose the limited liability protection that LLCs normally provide. This structure is only appropriate when the rental portfolio is adequately insured with a high-limit commercial umbrella policy that substitutes for the entity's liability shield. In that scenario, you're trading a tax structure you don't actually need (the entity's liability protection, if you have excellent insurance) for a tax exemption on F&E obligations that would otherwise accumulate annually.

The Tennessee Investment Services Trust

For investors prioritizing privacy and asset protection above tax efficiency, the Tennessee Investment Services Trust (TIST) is one of the most powerful structures available in any U.S. jurisdiction.

Codified under the Tennessee Investment Services Act of 2007 (T.C.A. § 35-16-101 et seq.), a TIST is a self-settled domestic asset protection trust—meaning the grantor can retain certain beneficial rights over the trust property while shielding it from most creditor claims. Key requirements: the trust must be irrevocable, contain a valid spendthrift provision, and use a qualified Tennessee trustee.

The protection timeline is aggressive by trust law standards: most claims against a TIST are barred 18 months after the grantor transfers property into the trust, or 6 months after a creditor should have discovered the transfer—whichever is later.

Recent legislative updates have modernized the TIST framework. The strict requirement for a contemporaneous "Qualified Affidavit" has been relaxed, though executing one still creates a strong rebuttable presumption that works in the grantor's favor. Trustees under T.C.A. § 35-15-816 have explicit statutory authority to lease, develop, subdivide, raze structures, and grant options over real property—making the TIST fully compatible with active real estate portfolio management.

For a high-net-worth investor holding significant Tennessee real estate and concerned about liability exposure, the TIST is worth a conversation with a Tennessee trust attorney. It's not a DIY structure.

Tennessee Foreclosure Timeline: What Investors Buying Distressed Property Need to Know

Tennessee is a non-judicial foreclosure state. Properties are secured by Deeds of Trust with power-of-sale clauses rather than traditional mortgages. This creates a foreclosure timeline that is notably faster than judicial states like Illinois or New York.

The process under current law (including 2025's HB 1127 amendments):

1. Default period (Days 1-90): Missed payments trigger a formal breach notice and acceleration clause.
2. Right to Foreclose Notice (Day 90+): Under T.C.A. § 35-5-117, the lender must send a specific notice of the right to foreclose 60 days before the first public advertisement.
3. Publication (Day 150+): Under the amended T.C.A. § 35-5-101, the trustee must advertise the sale at least twice (reduced from three times by 2025 legislation) in a local newspaper at least 20 days before the auction, and post online with a registered third-party service for at least 20 continuous days.
4. Auction: The property sells to the highest bidder at the county courthouse. There is no statutory right of redemption after a Tennessee non-judicial foreclosure sale.

For investors acquiring distressed properties or investing "subject-to" existing financing, the non-judicial framework means the window to cure a default is narrow. If a lender accelerates the loan following a title transfer, investors have roughly 60 to 90 days before the property moves toward auction—not the multi-year timeline that judicial states offer.

Practical Entity Strategy for Tennessee Investors

For most smaller landlords and first-time Tennessee investors, the decision tree is simpler than the legal complexity suggests:

• Family-owned portfolio? FONCE exemption is the obvious choice—straightforward filing, complete F&E tax elimination, no sacrifice of liability protection.
• Individual or non-family LLC with adequate commercial umbrella insurance? OME election eliminates F&E taxes at the cost of personal liability that insurance covers anyway.
• High-net-worth investor with asset protection as the primary concern? Explore the TIST with qualified Tennessee counsel.
• Standard out-of-state investor acquiring one to three properties? A standard Tennessee LLC provides the corporate veil and adequate protection for most situations; evaluate F&E tax exposure annually.

For a complete breakdown of Tennessee's entity structuring options, the URLTA compliance requirements, and the market-by-market investment analysis covering Nashville, Memphis, Clarksville, and Knoxville, the Tennessee Investment Property Guide covers everything you need to structure acquisitions correctly before your first closing.

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