1031 Exchange in Indiana
Indiana follows federal 1031 exchange rules and imposes a flat state income tax of 2.95% for 2026 (scheduled to fall to 2.90% in 2027), plus a county local income tax that every Indiana county levies. The state imposes no withholding on nonresident sellers of real property and no state-level real estate transfer tax, which keeps closings comparatively simple for out-of-state exchangers. Constitutional property tax caps (1% for homesteads, 2% for other residential and agricultural land, 3% for other real and personal property) limit the property tax exposure on replacement properties.
Fast Facts
- State Income Tax on Capital Gains
- 2.95% flat rate for 2026 (2.90% in 2027). Indiana taxes capital gains as ordinary adjusted gross income; gain deferred through a valid 1031 exchange is also deferred for Indiana purposes. Every Indiana county additionally levies a local income tax (0.5% to 3.38% in 2026).
- Conforms to Federal 1031
- Yes. Indiana's income tax starts from federal adjusted gross income, so a valid federal Section 1031 exchange is also respected at the state level.
- Non-Resident Withholding
- None. Indiana does not impose withholding on nonresidents selling real property, making the process simpler for out-of-state investors.
- Real Estate Transfer Tax
- None. Indiana imposes no state-level real estate transfer tax. County recording fees still apply when deeds are recorded.
- Property Tax Caps
- Constitutional circuit-breaker caps limit property tax bills to 1% of gross assessed value for homesteads, 2% for other residential property and agricultural land, and 3% for other real and personal property (most investment property falls in the 2% or 3% category).
Legislative Updates
State Income Tax Rate Drops to 2.95%
Under Indiana's phased rate reduction (HEA 1001-2022), the individual adjusted gross income tax rate fell from 3.05% (2024) to 3.00% (2025) to 2.95% for 2026, and is scheduled to reach 2.90% in 2027. Lower state rates reduce the state-level tax that a 1031 exchange defers.
No Indiana-Specific Changes to 1031 Treatment
Indiana has made no state-level changes to its treatment of Section 1031 exchanges. Because Indiana's income tax begins with federal adjusted gross income, exchanges that qualify federally continue to qualify for Indiana purposes.
Legal and Tax Considerations
State Income Tax on Capital Gains
2.95% flat rate for 2026 (2.90% in 2027). Capital gains are taxed as ordinary income; gain deferred under a valid 1031 exchange is deferred for Indiana purposes as well. County local income tax (0.5% to 3.38% in 2026) applies on top of the state rate.
Conforms to Federal 1031
Yes. Indiana's income tax calculation starts from federal adjusted gross income, so a valid federal Section 1031 exchange is also valid at the state level.
Non-Resident Withholding
None. Indiana does not impose withholding on nonresidents selling real property.
Real Estate Transfer Tax
None at the state level. Only county recording fees apply when deeds are recorded.
Property Tax Caps
Constitutional caps of 1% (homesteads), 2% (other residential and agricultural), and 3% (other real and personal property) of gross assessed value limit annual property tax bills.
Required Documentation
- Federal Form 8824
- Indiana Schedule 1 (for reporting adjustments)
- Complete closing statements for both properties
- Qualified Intermediary agreement
Clawback Rule
None
Step-by-Step Process
- 1
Identify Replacement Property
You must identify potential replacement properties within 45 days of selling your relinquished property. In Indiana, consider county-level differences in property tax rates and local income tax when identifying properties.
- 2
Engage a Qualified Intermediary
Work with a qualified intermediary to handle the exchange funds and documentation before closing on the sale of your relinquished property. The IRS requires that you not take actual or constructive receipt of the sale proceeds.
- 3
Close on Replacement Property
Complete the purchase of your replacement property within 180 days of selling your relinquished property. Indiana imposes no state real estate transfer tax, so closing costs are limited to standard items such as county recording fees and title charges.
- 4
File Tax Returns
Report your 1031 exchange on your federal tax return using Form 8824. Because Indiana's income tax starts from federal adjusted gross income, the federally deferred gain is automatically deferred on your Indiana return as well.
- 5
Check Property Tax Classification
Indiana's constitutional caps limit property tax bills to 1% of gross assessed value for homesteads, 2% for other residential property and agricultural land, and 3% for other real and personal property. Most investment property falls in the 2% or 3% category, so confirm how a replacement property will be classified before you commit.
- 6
Factor In County Local Income Tax
All 92 Indiana counties levy a local income tax on top of the state rate, ranging from 0.5% to 3.38% in 2026 depending on the county. If you live in Indiana or your entity is taxed here, factor the county rate into your projections when comparing replacement properties across counties.
- 7
Opportunity Zones (a Separate Program)
Indiana has 156 designated Qualified Opportunity Zones, in effect through December 31, 2028. Opportunity Zone investing is a separate federal deferral program with its own rules — it is generally an alternative to a 1031 exchange for a given gain, not a stackable add-on — but properties located in these zones may be relevant to your broader strategy.
Timeline Calculator
Enter the closing date of your relinquished property to calculate your 1031 exchange deadlines:
Common Pitfalls
Missing the 45-day identification or 180-day closing deadline
Issue
The federal deadlines are strict and are not extended for weekends, holidays, or financing delays (absent a federally declared disaster).
Prevention
Calendar both deadlines from the day your relinquished property closes and line up candidate replacement properties before you sell.
Misclassifying property under Indiana's tax caps
Issue
Indiana's circuit-breaker caps differ by property class: 1% of gross assessed value for homesteads, 2% for other residential and agricultural property, and 3% for other real and personal property. A property's classification materially changes its carrying cost.
Prevention
Verify with the county assessor how a prospective replacement property is classified and what its current tax bill is before identifying it.
Ignoring county local income taxes
Issue
While Indiana's state income tax rate is a low 2.95% (2026), every one of Indiana's 92 counties levies an additional local income tax, ranging from 0.5% to 3.38% in 2026.
Prevention
Look up the county income tax rate in Indiana DOR Departmental Notice #1 and factor it into your after-tax return calculations.
Taking receipt of sale proceeds
Issue
If you or your agent receive the sale proceeds — even briefly — the exchange fails and the gain becomes taxable at both the federal and Indiana level.
Prevention
Engage a qualified intermediary before closing on the relinquished property and route all funds through the intermediary.
Frequently Asked Questions
Does Indiana conform to federal 1031 exchange rules?
Yes. Indiana’s income tax calculation begins with federal adjusted gross income, so gain deferred under a valid federal Section 1031 exchange is also deferred for Indiana purposes. Indiana has no clawback provision; deferred gain is generally taxed when (and where) a later taxable sale occurs.
What is Indiana’s state income tax rate on capital gains?
Indiana taxes capital gains as ordinary income at a flat 2.95% for 2026, scheduled to fall to 2.90% in 2027 under the state’s phased rate reduction. County local income taxes (0.5% to 3.38% in 2026) apply on top of the state rate.
Does Indiana have any special withholding requirements for non-residents selling real estate?
No. Indiana does not impose withholding on nonresidents selling real property, which simplifies closings for out-of-state investors engaging in 1031 exchanges.
Does Indiana charge a real estate transfer tax?
No. Indiana imposes no state-level real estate transfer tax. Standard county recording fees apply when deeds are recorded.
How do Indiana’s property tax caps work?
Indiana’s constitution caps annual property tax bills at 1% of gross assessed value for homesteads, 2% for other residential property and agricultural land, and 3% for other real and personal property. Most 1031 replacement properties (rentals, commercial) fall in the 2% or 3% category.
Major Cities
Indianapolis, Fort Wayne, Evansville, South Bend, Carmel, Fishers, Bloomington, Hammond, Gary, Lafayette, Muncie, Terre Haute, Kokomo, Noblesville, Greenwood
References
Official References
- Indiana Department of Revenue — Tax Rates, Fees & Penalties
- Indiana DOR Departmental Notice #1 — County Income Tax Rates
- Indiana DLGF — Tax Bill 101 (Property Tax Caps)
- Indiana OCRA — Opportunity Zones
- IRS — Like-Kind Exchanges (Section 1031)
This information is for educational purposes only and is not legal or tax advice. Consult with qualified professionals regarding your specific situation.