The temple was founded by Ashikaga Takauji in 1339, primarily to venerate Gautama Buddha, and its first chief priest was Musō Soseki.

In the early Heian period, Empress Tachibana no Kachiko, wife of Emperor Saga, founded a temple called Danrin-ji on the site of present-day Tenryū-ji.

When his former-friend-turned-enemy died, Ashikaga recommended that Zen monk Musō Soseki construct a temple for his memorial service.

However, Ashikaga Takauji's younger brother, Tadayoshi supposedly had a dream about a golden dragon flitting about the Ōi River (also known as the Hozu River), which lies south of the temple, and the temple was instead named Tenryū Shiseizen-ji—the term "Tenryū" literally means "dragon of the sky".

This arrangement with the Tenryū-ji allowed for formal trade to be undertaken between the two countries, in exchange for China's control over the succession of chief abbot of the temple.

The temple was severely damaged during the Kinmon Incident of 1864, and most of the buildings as they stand today are reconstructions from the latter half of the Meiji period.

Generally, Zen temple grounds are designed so that they face the south, with major buildings aligned along the north-south axis.

The garden, created by Musō Soseki, features a circular promenade around Sōgen Pond (曹源池, sōgenchi) and is designated as a Special Place of Scenic Beauty of Japan.