TN Franchise & Excise Tax on Sale of Property

[Margaret Feit]

My husband and I own four STRs in Tennessee. We run them through a Tennessee LLC for accounting and management purposes, but we hold title in our own names. Even though the LLC doesn't actually own the properties, we are definitely doing business and making income in Tennessee, so we have been filing a business tax return with the STR income reported under the LLC. We applied for and received a FONCE exemption for the Franchise & Excise tax, so we haven't had to pay these taxes anyway.

This year we are planning to sell one of the properties for a substantial capital gain, which I understand does not fall under the "passive activity" definition for the TN F&E tax. If the property was actually owned by the LLC, then I know I would have to report the gain as non-passive income, which would make us ineligible for the FONCE exemption this year, triggering a massive tax not just on that gain, but also on the rest of our STR income for this year. But here is my question:

Because the property is not actually owned by the LLC, the LLC itself will not actually have any capital gain. The gain will be reported on my personal federal tax return in my own name. Can I just leave this sale & capital gain income off my business tax form and FONCE application for this year and only report the rental income? Or if I am submitting the rental income for a property that the LLC does not actually own, then do I also need to submit the capital gain on said property for business tax purposes?

And a follow-up question - should I even be filing business tax for this LLC in the first place, seeing as it doesn't actually own the properties I am running under it?