diff --git a/packages/mentis/src/hooks/useContentEditableMention.ts b/packages/mentis/src/hooks/useContentEditableMention.ts
index ebd0926..dd8d68d 100644
--- a/packages/mentis/src/hooks/useContentEditableMention.ts
+++ b/packages/mentis/src/hooks/useContentEditableMention.ts
@@ -120,7 +120,7 @@ export function useContentEditableMention({
       return;
     }
 
-    // Handle selection
+    // Handle selection when modal is open with options
     if (showModal && filteredOptions.length > 0) {
       if (key === "Enter" || key === "Tab") {
         e.preventDefault();
diff --git a/packages/mentis/src/utils/extractMentionData.ts b/packages/mentis/src/utils/extractMentionData.ts
index 5622384..657f2cc 100644
--- a/packages/mentis/src/utils/extractMentionData.ts
+++ b/packages/mentis/src/utils/extractMentionData.ts
@@ -15,6 +15,7 @@ export const extractMentionData = (element: HTMLElement): MentionData => {
       currentIndex += textContent.length;
     } else if (node.nodeType === Node.ELEMENT_NODE) {
       const element = node as HTMLElement;
+      const tagName = element.tagName.toLowerCase();
 
       // Check if this is a mention chip
       if (element.dataset.value && element.dataset.label) {
@@ -33,11 +34,39 @@ export const extractMentionData = (element: HTMLElement): MentionData => {
         // dataValue shows the value (actual data)
         dataValue += element.dataset.value;
         currentIndex += chipText.length;
+      } else if (tagName === "br") {
+        // Handle <br> elements as newlines
+        displayValue += "\n";
+        dataValue += "\n";
+        currentIndex += 1;
+      } else if (tagName === "div" && element.childNodes.length === 0) {
+        // Handle empty <div> elements as newlines (contentEditable creates these for Enter)
+        displayValue += "\n";
+        dataValue += "\n";
+        currentIndex += 1;
       } else {
+        // Handle <div> with content and other block elements that should add newlines
+        const isBlockElement = ["div", "p", "h1", "h2", "h3", "h4", "h5", "h6"].includes(tagName);
+        const hasContent = element.childNodes.length > 0;
+        
+        // Add newline before block element (except for the first element)
+        if (isBlockElement && hasContent && (displayValue.length > 0 || dataValue.length > 0)) {
+          displayValue += "\n";
+          dataValue += "\n";
+          currentIndex += 1;
+        }
+        
         // Recursively process child nodes
         for (const child of Array.from(element.childNodes)) {
           walkNodes(child);
         }
+        
+        // Add newline after block element (except for the last element in the container)
+        if (isBlockElement && hasContent && element.nextSibling) {
+          displayValue += "\n";
+          dataValue += "\n";
+          currentIndex += 1;
+        }
       }
     }
   };
diff --git a/packages/mentis/src/utils/reconstructFromDataValue.ts b/packages/mentis/src/utils/reconstructFromDataValue.ts
index 9bb8faf..4398aa6 100644
--- a/packages/mentis/src/utils/reconstructFromDataValue.ts
+++ b/packages/mentis/src/utils/reconstructFromDataValue.ts
@@ -77,11 +77,17 @@ export const reconstructFromDataValue = ({
     }
   }
 
+  // Helper function to convert newlines to HTML
+  const convertNewlinesToHTML = (text: string): string => {
+    return text.replace(/\n/g, '<br>');
+  };
+
   // Build the HTML content
   for (const match of filteredMatches) {
     // Add any text before this mention
     if (match.index > currentIndex) {
-      result += dataValue.slice(currentIndex, match.index);
+      const textBeforeMention = dataValue.slice(currentIndex, match.index);
+      result += convertNewlinesToHTML(textBeforeMention);
     }
 
     // Add the mention chip
@@ -91,7 +97,7 @@ export const reconstructFromDataValue = ({
       result += `<span class="${chipClassName}" data-value="${match.value}" data-label="${currentLabel}" contenteditable="false">${chipContent}</span>`;
     } else {
       // If we can't find the option, just add the value as plain text
-      result += match.value;
+      result += convertNewlinesToHTML(match.value);
     }
 
     currentIndex = match.index + match.length;
@@ -99,7 +105,8 @@ export const reconstructFromDataValue = ({
 
   // Add any remaining text after the last mention
   if (currentIndex < dataValue.length) {
-    result += dataValue.slice(currentIndex);
+    const remainingText = dataValue.slice(currentIndex);
+    result += convertNewlinesToHTML(remainingText);
   }
 
   return result;
diff --git a/packages/mentis/tests/newlines.test.tsx b/packages/mentis/tests/newlines.test.tsx
new file mode 100644
index 0000000..360d3f7
--- /dev/null
+++ b/packages/mentis/tests/newlines.test.tsx
@@ -0,0 +1,131 @@
+import React from "react";
+import { render, screen, fireEvent } from "@testing-library/react";
+import { expect, test, vi, describe } from "vitest";
+import userEvent from "@testing-library/user-event";
+import { MentionInput } from "../src/components/MentionInput";
+import { extractMentionData } from "../src/utils/extractMentionData";
+import { reconstructFromDataValue } from "../src/utils/reconstructFromDataValue";
+
+const options = [
+  { label: "John Doe", value: "john" },
+  { label: "Jane Smith", value: "jane" },
+];
+
+describe("Newline handling", () => {
+  test("Should preserve newlines in dataValue and displayValue when pressing Enter", async () => {
+    const mockOnChange = vi.fn();
+    render(<MentionInput options={options} onChange={mockOnChange} />);
+
+    const user = userEvent.setup();
+    const editorElement = screen.getByRole("combobox");
+
+    // Type some text, then press Enter, then type more text
+    await user.type(editorElement, "First line{enter}Second line");
+
+    // Check that onChange was called with newlines preserved
+    expect(mockOnChange).toHaveBeenCalledWith(
+      expect.objectContaining({
+        displayValue: "First line\nSecond line",
+        dataValue: "First line\nSecond line",
+        mentions: [],
+      })
+    );
+  });
+
+  test("Should extract newlines correctly from contentEditable with <br> elements", () => {
+    // Create a test element with <br> tags
+    const testElement = document.createElement("div");
+    testElement.innerHTML = "First line<br>Second line<br>Third line";
+
+    const result = extractMentionData(testElement);
+
+    expect(result.displayValue).toBe("First line\nSecond line\nThird line");
+    expect(result.dataValue).toBe("First line\nSecond line\nThird line");
+    expect(result.mentions).toEqual([]);
+  });
+
+  test("Should extract newlines correctly from contentEditable with empty <div> elements", () => {
+    // Create a test element with empty div tags (contentEditable creates these for Enter)
+    const testElement = document.createElement("div");
+    testElement.innerHTML = "First line<div></div>Second line";
+
+    const result = extractMentionData(testElement);
+
+    expect(result.displayValue).toBe("First line\nSecond line");
+    expect(result.dataValue).toBe("First line\nSecond line");
+    expect(result.mentions).toEqual([]);
+  });
+
+  test("Should reconstruct HTML correctly with newlines", () => {
+    const dataValue = "First line\nSecond line\nThird line";
+    
+    const result = reconstructFromDataValue({
+      dataValue,
+      options,
+      trigger: "@",
+      keepTriggerOnSelect: true,
+      chipClassName: "mention-chip",
+    });
+
+    expect(result).toBe("First line<br>Second line<br>Third line");
+  });
+
+  test("Should handle newlines with mentions correctly", () => {
+    // Create a test element with mentions and newlines
+    const testElement = document.createElement("div");
+    testElement.innerHTML = 'Hello <span class="mention-chip" data-value="john" data-label="John Doe" contenteditable="false">@John Doe</span><br>How are you?';
+
+    const result = extractMentionData(testElement);
+
+    expect(result.displayValue).toBe("Hello @John Doe\nHow are you?");
+    expect(result.dataValue).toBe("Hello john\nHow are you?");
+    expect(result.mentions).toEqual([
+      {
+        label: "John Doe",
+        value: "john",
+        startIndex: 6,
+        endIndex: 15,
+      },
+    ]);
+  });
+
+  test("Should reconstruct HTML correctly with mentions and newlines", () => {
+    const dataValue = "Hello john\nHow are you?";
+    
+    const result = reconstructFromDataValue({
+      dataValue,
+      options,
+      trigger: "@",
+      keepTriggerOnSelect: true,
+      chipClassName: "mention-chip",
+    });
+
+    expect(result).toBe('Hello <span class="mention-chip" data-value="john" data-label="John Doe" contenteditable="false">@John Doe</span><br>How are you?');
+  });
+
+  test("Should handle multiple newlines correctly", () => {
+    // Create a test element with multiple newlines
+    const testElement = document.createElement("div");
+    testElement.innerHTML = "Line 1<br><br>Line 3<br><br><br>Line 6";
+
+    const result = extractMentionData(testElement);
+
+    expect(result.displayValue).toBe("Line 1\n\nLine 3\n\n\nLine 6");
+    expect(result.dataValue).toBe("Line 1\n\nLine 3\n\n\nLine 6");
+    expect(result.mentions).toEqual([]);
+  });
+
+  test("Should reconstruct multiple newlines correctly", () => {
+    const dataValue = "Line 1\n\nLine 3\n\n\nLine 6";
+    
+    const result = reconstructFromDataValue({
+      dataValue,
+      options,
+      trigger: "@",
+      keepTriggerOnSelect: true,
+      chipClassName: "mention-chip",
+    });
+
+    expect(result).toBe("Line 1<br><br>Line 3<br><br><br>Line 6");
+  });
+});