Nonresident to File Tax on Rental Property?

[Dhult]

Originally Posted by ry-hab

DEAR TYLER

YES is the short answer. I was stung with this last year.
I have done a tremendous amount of research and would gladly chat about it in specific detail if you desire.
However, I did find the folks at the Franchise/Excise Tax board to be very helpful - 615-253-0600

Long and short. They require both Franchise AND excise tax on rentals.
Franchise tax is based upon VALUE of the property. THis is your BOOK value - which could be minus any depreciation your accountant is carrying for you. OR it could be actual value minus any indebtedness you have (ie Mortgage)
Excise Tax is the INCOME from your rents - minus any repairs or expenses.
BOTH of these taxes are due annually!

SUCKS

However, there are a FEW exemptions available. This is where talking to someone at the tax board helps. They don't want to share these exemptions readily - you gotta really PRY.

You can research the FONCE exemption - it needs to be applied for EACH YEAR - they CAN DENY it. This has specific parameters - most important detail to me is/was that you can only own LESS than 4 rentals ands still qualify for FONCE.

Hopes this helps.
Reply and I will figure out how to continue the conversation if needed.

I called last week and spoke to a friend that has a rental property. He should know very well because he has had his property for over 30 years.

The question asked by the original poster was

Does an individual who does not live or work in Tennessee but owns a house strictly for investment purposes (rental) need to file a Tennessee state tax return?

The key word above is individual from my understanding.

His answer was a firm NO. Many investors set up LLC's and other entities when purchasing rental property. The Fonce is for them, he states if it is a individual or family owned entity. If not a registered corporation or business but a sole proprietor you don't even need to qualify for the Fonce he states because you aren't considered a business by simply owning property and renting it out as a individual.

If he is wrong, I would like to know. He assures me he has never had to pay the franchise and excise tax as a individual.

That is my understanding of what I was told.

[Dhult]

Trying to look this up this morning I came across this

Excerpt-

The State of Tennessee imposes two taxes for the privilege of doing business within its
boundaries. These taxes are the excise tax and the franchise tax and they are imposed on
corporations and most limited liability companies. General partnerships and sole
proprietorships are not subject to these taxes. The excise tax is based on the net income of
the company for the tax year. The franchise tax is an asset based tax on the greater of net
worth of the company or the book value of real and tangible personal property owned or
used in Tennessee at the end of the taxable period.
Although the franchise and excise tax are two separate taxes generally, any taxpayer that is
liable for one will also be liable for the other. Entities liable for these taxes will compute and
pay the tax on one form filed with the State of Tennessee (Form FAE 170). Form FAE 170 is
due 3 1/2 months after the entity’s year end. A return is required for every fiscal closing of
the books of each taxpayer and will coincide with each federal return filing period.
If you are doing business in the State of Tennessee you are liable for these taxes, unless
you are a partnership or sole proprietorship. The following entities are examples of some
types of businesses which are liable for the franchise and excise tax: corporations,
subchapter S corporations, limited liability company, professional limited liability company,
registered limited liability partnerships, limited partnerships and real estate investment trusts.
It is important to note that out-of-state corporations doing business in Tennessee are also
subject to the franchise, excise tax even if they are not incorporated or domesticated in
Tennessee.

From reading this I would conclude that he is correct.
So if it is in a trust, LLC or other entity then yes you would have to pay the Franchise and Excise taxes.
Even then if it is a limited liability company, and individual or family controlled then you can obtain the exemption and still not pay these taxes.

[jhawks117]

I see the first post was in 2008. A lot has happened since then.

[url]http://www.tennessee.gov/assets/entities/revenue/attachments/feguide.pdf[/url]

It SPECIFICALLY calls out non-corporate entities that are family-owned and own 4 or less residential properties as exempt from taxes, and says nothing about having to file paperwork for it.

[HaroldXSchwartz]

HardMcy is correct. Rent is not the type of income that gets taxed on an individual's stat tax return, and the business taxes (Franchise and Excise) do not apply in this case.

Google on "tn department of revenue rental property tax" has the support page at the Tn Dept of Revnue answering the question "Is the rental of residential property subject to business tax?" The answer is: "Business tax does not apply to gross receipts derived from the sale, lease, or rental of real property that belongs to an individual unless the rental or lease of such property is for transient occupancy in a hotel, motel, or rooming house. If residential property is rented or leased for long-term residential purposes, the income generated from those leases is not subject to business tax."

To make sure, I called their support line 615-253-0600. Her first question was "Are you an individual?" Yes (and not a corporation, LLC, etc., that would certainly be subject to the business tax). Do you use the property for short-term leasing? Less than 90 days?" No (we are not renting out the property like a hotel). "You are still required to include the rent on your federal income tax return, but you do not need to report it to the state of TN."

No filing for exemption required. No filing of any kind.