The short answer
Indiana adjusted gross income starts from federal AGI, so gain deferred under section 1031 is deferred from the state's flat 2.95% tax for 2026 and from the county local income tax that residents owe on the same dollars. Indiana collects no transfer tax on the deed, requires no withholding from the seller at closing and has no mechanism to recapture deferred gain once it sits in a DST elsewhere; the only recording-day filing is the $10 sales disclosure form. What an Indiana seller gives up is the 2% or 3% property tax cap on the building they sold, which stops mattering once the equity sits in a DST.
Indiana at a glance
| State income tax on gains | Flat 2.95% for tax year 2026, falling to 2.90% in 2027 |
|---|---|
| County local income tax | 0.5% to 3.0% by county for 2026, fixed by residence or workplace on January 1 |
| Transfer tax | None; State Form 46021 sales disclosure with a $10 county fee is filed instead |
| Withholding at closing | None on real estate sales by nonresidents |
| Claw-back on out-of-state replacement | None; no Indiana addback or form follows gain deferred into another state's property |
| Property tax caps | 1% homestead, 2% other residential and farmland, 3% nonresidential |
| New deduction for 2% cap property | 6% of assessed value for 2025-pay-2026, rising to 33.4% by 2030-pay-2031 |
| Assessment | Annual adjustment to market value-in-use; appeals to the assessor by June 15 |
A 2.95% state rate plus your county's rate, both deferred together by the exchange
Indiana's individual adjusted gross income tax is a flat 2.95% for 2026 and falls to 2.90% in 2027 under the Department of Revenue's published schedule. Since Indiana AGI begins with federal AGI, a capital gain on a rental is taxed at the same flat rate as wages, and gain deferred under section 1031 never reaches the IT-40.
The second layer is the county local income tax, which for 2026 ranges from 0.5% to 3.0% depending on the county listed in Departmental Notice #1. Residents pay their county's rate on Indiana AGI, including the gain from selling a rental anywhere, and the county is fixed by where you lived on January 1 of the tax year, so a move later in the year does not change the rate. Counties may adjust their rates in January and October, and the chart in force for the year is the Departmental Notice #1 published for that January 1.
Combined, a fully taxable sale by a Marion County resident (2.02% county rate in 2026) costs 4.97% of the gain at the state and county level, and an exchange defers both layers at once.
Nonresident owners owe the state tax on the gain, but county tax only if they work in Indiana
A nonresident who sells Indiana real estate owes the 2.95% state tax on that Indiana-source gain and reports it on Form IT-40PNR, as Information Bulletin #28 explains. County tax works differently: a nonresident is subject to it only when their principal place of business or employment was in an Indiana county on January 1, and then on income derived from that county, which Information Bulletin #32 says includes sales or exchanges of property located there.
So a Chicago investor with no Indiana job who sells a Gary duplex pays the state tax but no county tax, while an Illinois resident who works in Lake County pays Lake County's rate on the gain as well; reciprocal agreements with neighboring states do not apply to the county tax.
No Indiana statute obliges a buyer or closing agent to hold back tax from a nonresident seller, so compliance runs through the IT-40PNR and estimated payments, or through a composite return when the property is held by an entity.
When an LLC or trust is the Indiana seller: composite returns and county tax on pass-through gain
An LLC taxed as a partnership passes the gain, or the deferral, through to its members' returns. A nonresident member can be covered by the entity's composite return and then need not file Form IT-40PNR, although Information Bulletin #28 notes the member may still file one by choice.
For an Indiana resident member, Information Bulletin #32 counts business profits from partnerships and S corporations in the county tax base, so the county rate reaches the member's share of any recognized gain. For a nonresident member, county tax applies only if that member's own principal place of business or employment was in an Indiana county on January 1.
Where the entity itself will complete the exchange, the identification and closing deadlines run from the entity's sale, so any member who wants cash instead of a DST interest should be dealt with before the relinquished property closes, with an Indiana CPA reviewing the split.
No transfer tax in Indiana, only a sales disclosure form and a $10 fee
Indiana is one of the states with no deed stamp at all: neither the state nor its counties tax the transfer, in an ordinary sale or an exchange. What the state requires instead is State Form 46021, the Sales Disclosure Form prescribed under IC 6-1.1-5.5, completed whenever a conveyance document is filed; the county auditor may not accept the conveyance without a complete form, and the filer pays a $10 fee to the county.
The form feeds the assessor's sales database, which drives the annual adjustment of assessed values. It has no line for a 1031 exchange, and the deferred gain leaves no Indiana trace after closing; the only record is federal Form 8824, whose result flows into federal AGI and therefore into Indiana AGI.
Property tax caps of 2% for rentals and farmland and 3% for commercial, and what SEA 1 phases in
Indiana's constitutional circuit breaker limits the tax bill to 1% of gross assessed value for a homestead, 2% for other residential property (a single-family rental or a building with two or more units), long-term care property and agricultural land, and 3% for nonresidential real and personal property. Assessed values are adjusted annually to market value-in-use, so a sale does not trigger a reassessment by itself, although the price you accept becomes evidence for next year's value.
Senate Enrolled Act 1 of 2025 added a deduction for property in the 2% category under IC 6-1.1-12-47 that phases in from 6% of assessed value for 2025-pay-2026 and 12% for 2026-pay-2027 up to 33.4% for 2030-pay-2031 and after, according to the Department of Local Government Finance's May 2026 memo. The homestead standard deduction is phasing down over the same years.
For a landlord weighing a sale, the 2% cap and the new deduction strengthen the case for holding an Indiana rental; for a seller of commercial property at the 3% cap, an exchange into a DST removes that bill entirely. An assessment can be appealed to the county assessor by June 15 of the year the Form 11 notice is mailed.
Replacement property
DST replacement property and the Indiana return
An Indiana resident who exchanges into a traditional DST holding property in other states reports the DST income on Form IT-40 with all other income, and Indiana allows a credit for individual income tax paid to other states on that income when the other state's return is filed. How that credit meshes with the county tax is a question for your CPA.
A nonresident whose only Indiana asset was the property sold generally stops filing IT-40PNR after the year of sale, because DST income from property elsewhere is not Indiana-source. If a sponsor's DST holds an Indiana asset, such as Indianapolis industrial space, that slice is Indiana-source income for every investor, resident or not.
Breakwater Exchange, whose DST transactions have passed the billion-dollar mark, places Indiana sellers into DSTs and cash-out DST structures from vetted national sponsors; confirm the Indiana treatment of a specific portfolio with your CPA and the Indiana Department of Revenue before the exchange agreement is signed.
Questions investors ask about 1031 exchanges in Indiana
Does my Indiana county income tax apply to the gain on a rental sale?
For a resident, yes, at the county rate in effect for the year, on top of the 2.95% state tax; a completed 1031 exchange defers both because the gain never enters Indiana AGI.
Is there a transfer tax or deed stamp when I sell property in Indiana?
No. Indiana has no real estate transfer tax; the parties file State Form 46021, the sales disclosure form, with a $10 fee to the county.
I live in Ohio and sold a Fort Wayne rental; do I owe Allen County tax?
Only if your principal place of business or employment was in Allen County on January 1; otherwise you owe the 2.95% state tax on the gain through Form IT-40PNR and no county tax.
Does Indiana claw back deferred gain if my DST holds property in another state?
No. Indiana starts from federal AGI and has no addback or tracking form for gain deferred under section 1031, wherever the replacement property sits.
What happens to my Indiana rental's property tax if I keep it instead of exchanging?
It stays under the 2% cap and picks up the new SEA 1 deduction, 12% of assessed value for 2026-pay-2027 and rising to 33.4% by 2030-pay-2031.
Sources
The rules above were checked against these publications on September 18, 2026. Rates and forms change; confirm the current version with your CPA and the Indiana tax agency before you close. This page is general information, not tax or legal advice.
- Indiana Department of Revenue, Rates, Fees and Penalties (2026 and 2027 individual rates)
- Indiana Department of Revenue, Departmental Notice #1, county tax rates effective January 1, 2026
- Indiana Department of Revenue, Income Tax Information Bulletin #32, County Tax
- Indiana Department of Revenue, Income Tax Information Bulletin #28, residents with out-of-state income and nonresidents
- Department of Local Government Finance, Property Tax Caps / Circuit Breaker Credits fact sheet
- Department of Local Government Finance, May 27, 2026 memo on legislation affecting deductions, credits and exemptions (SEA 1-2025 reminders)
- State Form 46021, Sales Disclosure Form (IC 6-1.1-5.5), with statutory filing-fee text
- Department of Local Government Finance, Citizen's Guide to Property Tax