1031 exchange in
Indiana.

Does Indiana follow federal 1031 rules?

Indiana conforms to federal Section 1031 for real property and has no clawback. There is no non-resident real estate withholding. The often-cited Indiana county income taxes (Local Income Tax, or LIT) apply to residents based on county of residence, not to non-residents on Indiana-source real estate gain — a distinction that confuses out-of-state buyers and CPAs.

Indiana capital gains tax structure

Indiana has a flat 3.05% state income tax rate (2026), one of the lowest among conforming states. County income taxes (CAGIT/COIT/LIT) layer 1-3% on top for Indiana residents, but generally do not apply to non-resident sellers of Indiana real property.

Indiana's flat 3.05% individual income tax rate (2026) is among the lowest in the country and has been gradually declining from 3.23% over the past several years, with continued reductions targeting 2.9% by 2027 if revenue triggers are met. Capital gains are taxed as ordinary income with no long-term preferential rate. Indiana counties impose Local Income Tax (LIT, formerly CAGIT/COIT/CEDIT), which ranges from roughly 0.5% to 3% depending on county — but LIT applies based on the taxpayer's county of residence, not the location of the property, which means non-resident sellers of Indiana real estate generally do not owe county tax on the Indiana-source gain. Indiana's property tax circuit breaker caps tax at 1% of gross assessed value for owner-occupied residential, 2% for residential rental and farmland, and 3% for other real property — a meaningful protection for commercial 1031 buyers. Estimated tax payments are due quarterly when expected liability exceeds $1,000.

Federal tax treatment of a successful 1031 is deferral of capital gain and unrecaptured Section 1250 depreciation recapture (federally taxed at a maximum 25% when eventually recognized). Indiana's state treatment sits on top of those federal rates.

Common 1031 replacement strategies in Indiana

Indianapolis is the dominant 1031 destination in Indiana and one of the most active industrial markets in the Midwest. The central-US geography (within a day's drive of 80% of US population) plus interstate convergence (I-65, I-69, I-70, I-74) plus the FedEx Indianapolis hub plus the Amazon/Walmart distribution presence has driven sustained big-box absorption since 2018. Stabilized credit-tenant industrial trades 5.5–6.5% on big-box, 6.5–7.5% on smaller-bay flex. Class B multifamily holds 6.0–7.5%. Pharma (Eli Lilly), agriculture (Cummins, Subaru, Toyota), and finance (Anthem/Elevance) anchor downtown Indianapolis office and adjacent multifamily — though office is challenged like every Midwest CBD post-2020. Fort Wayne is defense-anchored (BAE, GE Aviation/Avio Aero), Evansville is regional manufacturing and medical, South Bend is Notre Dame-anchored eds-and-meds plus the renewed downtown story tied to Mayor Buttigieg-era redevelopment. NNN retail trades broadly across the state at 6.0–7.5%.

Top Indiana CRE markets for 1031 buyers

Indianapolis

The most active industrial 1031 market in the Midwest outside Chicago. Big-box logistics along I-65, I-70, and I-74 trades 5.5–6.5% for stabilized credit-tenant deals; smaller-bay flex compresses to 6.5–7.5%. Class A urban multifamily (Mass Ave, Fountain Square, Bottleworks) trades 5.25–6.25%; suburban Class B garden-style holds 6.0–7.0%. Eli Lilly, Cummins, and Salesforce anchor downtown demand. Property tax circuit breaker at 2% on residential rental / 3% on other commercial provides a useful tax-burden ceiling that comparable Midwest metros lack.

Fort Wayne

Fort Wayne is anchored by defense (BAE Systems, GE Aviation/Avio Aero), insurance (Lincoln Financial), and manufacturing. Class B multifamily trades 6.5–7.5%; industrial and small-bay flex 6.5–7.5%. The federal-defense employment base provides demand stability, and the cost basis is materially lower than Indianapolis. Broker depth is adequate but not deep — exit timelines run longer than Indianapolis.

Evansville

Evansville is regional manufacturing (Berry Global, Toyota's Princeton plant nearby), medical (Deaconess, Ascension St. Vincent), and the regional retail hub for Southwest Indiana / Western Kentucky. Class B multifamily trades 7.0–8.0%; small-bay industrial 7.0–8.0%; NNN retail along Lloyd Expressway 6.5–7.5%. Tertiary market — broker depth is thin and yields reflect the liquidity discount. A 1031 destination for investors who specifically want regional exposure or are sourcing through local brokers.

South Bend

Notre Dame is the dominant economic anchor — eds-and-meds (the university, Beacon Health System) plus a renewed downtown story. Multifamily near campus and downtown trades 6.0–7.0%; broader Class B garden-style 6.5–7.5%. The student-housing submarket is competitive but specialized. Outside the Notre Dame halo, the South Bend market thins quickly and broker depth is limited. The renewed downtown investment cycle has produced some interesting infill product but most of it is institutionally-held.

Local counsel, recording, and filing in Indiana

Indiana is not an attorney-state for closings — title companies handle most closings without attorney supervision. For Indianapolis CRE work, the local bar is solid; Bose McKinney & Evans, Ice Miller, and Faegre Drinker (Indianapolis office) handle the larger institutional work, with several mid-size firms covering the active-deal market. Recording is at the county Recorder's office. Indiana's Department of Revenue is generally responsive on 1031 questions and the state has not historically been aggressive on conformity issues. For multi-county portfolios or unusual property types, retain Indianapolis counsel familiar with Indiana real property and tax law — secondary-market attorneys handle 1031 work less frequently.

Recent developments in Indiana

Indiana's flat-rate phase-down continues: 3.15% in 2024, 3.05% in 2025-2026, with continued reductions targeting 2.9% by 2027 contingent on revenue triggers (Senate Bill 1, 2022). Indianapolis industrial absorption has remained strong through 2024-2026, though new construction deliveries in the I-65 South corridor and the Mt. Comfort submarket are creating modest oversupply pressure on speculative big-box. Watch the LEAP District (Lebanon Economic Advancement Project) in Boone County — a major state-promoted technology and advanced manufacturing district that has generated controversy over water-use commitments but is on track to attract significant capital investment through the late 2020s.

Common mistakes in Indiana 1031 exchanges

• Assuming Indiana county income taxes apply to your non-resident gain. Indiana counties impose Local Income Tax (LIT) of roughly 0.5-3% based on county of residence, not based on where the property sits. A non-resident seller of Indiana real estate generally owes state-level tax (3.05%) on the Indiana-source gain but does not owe county LIT — even if the property is in a high-LIT county like Marion (Indianapolis) or Allen (Fort Wayne). Out-of-state CPAs unfamiliar with Indiana sometimes add 2-3% county LIT to their projected liability, overstating the tax bill by a meaningful margin.
• Underwriting Indianapolis industrial without checking pipeline supply. Indianapolis industrial absorption has been strong since 2018, but speculative new construction deliveries in the I-65 South corridor (Greenwood, Whiteland) and Mt. Comfort submarkets through 2024-2026 are creating localized oversupply pressure on big-box. A 1031 buyer underwriting a stabilized big-box at peak rents needs to model lease-renewal risk against current new-construction availability and rent comps. Credit-tenant single-tenant with 7+ years of remaining term is meaningfully safer than multi-tenant flex on this dynamic.
• Forgetting the property tax circuit breaker classification matters. Indiana's property tax circuit breaker caps tax at 1% of gross assessed value for owner-occupied residential, 2% for residential rental and farmland, and 3% for other real property. The classification is determined by the assessor based on use — and getting it wrong (e.g., a multifamily property classified as 'other' rather than residential rental) costs you 1% of assessed value annually. Verify the classification on the current tax bill and confirm with the county assessor before closing on any 1031 replacement.

What to do if you're starting a Indiana-source 1031

1. Engage a Qualified Intermediary before the downleg closes. Your QI cannot be a disqualified person (attorney, CPA, or real estate agent who has represented you in the last two years).
2. Confirm state conformance and any clawback or withholding filings with a Indiana-licensed CPA.
3. Identify replacement property within 45 days in writing, delivered to your QI, under the Three-Property Rule or one of the alternative identification rules.
4. Close on replacement within 180 days of the downleg closing or by your federal tax-return due date (with extensions), whichever is earlier.
5. File Form 8824 with your federal return reporting the exchange. File any required Indiana state forms for the year, including any clawback or withholding-exemption filings.

FAQ: 1031 exchanges in Indiana

Do Indiana county income taxes apply to me as a non-resident selling Indiana real estate?

Generally no. Indiana Local Income Tax (LIT) is imposed by counties based on the taxpayer's county of residence, not based on where the property sits. A non-resident seller of Indiana real estate owes state-level tax (3.05% in 2026) on the Indiana-source gain on Form IT-40PNR, but does not owe county LIT on the Indiana-source income. Indiana residents owe LIT to their county of residence regardless of where the income is sourced. This is a frequent point of confusion for out-of-state CPAs.

Does Indiana have non-resident real estate withholding?

No. Indiana does not require buyer-side withholding on sales by non-residents. Out-of-state sellers report the Indiana-source gain on Form IT-40PNR and pay any liability with the return. Combined with the absence of a clawback and one of the lowest flat rates in the country (3.05% in 2026), Indiana has among the most procedurally simple state-level tax regimes for a 1031 transaction.

How does Indiana's property tax circuit breaker affect my 1031 underwriting?

Indiana caps property tax at 1% of gross assessed value for owner-occupied residential, 2% for residential rental and farmland, and 3% for all other real property. For a 1031 buyer, this provides a useful tax-burden ceiling that comparable Midwest states (Illinois, Ohio) do not match — you can underwrite a property tax line at the circuit-breaker cap with reasonable confidence. Verify the property's classification with the county assessor before closing; multifamily properties should be classified as residential rental (2% cap), not 'other' (3% cap).

Why is Indianapolis such an active industrial 1031 market?

Geography and infrastructure. Indianapolis is within a day's drive of 80% of the US population, sits at the convergence of I-65, I-69, I-70, and I-74, hosts the FedEx Indianapolis hub (the second-largest FedEx air hub globally), and has attracted Amazon, Walmart, and major 3PL distribution presence. The combination drives sustained credit-tenant logistics absorption and supports a deep 1031 market in big-box and smaller-bay industrial. The 2-3% property tax ceiling, low state income tax, and friendly business climate add to the appeal.

Is Indiana's flat rate really declining each year?

Yes, on a glide path. Senate Bill 1 (2022) set the schedule: 3.15% in 2024, 3.05% in 2025-2026, with continued reductions targeting 2.9% by 2027 contingent on revenue triggers. The 2027 reduction is not guaranteed — it requires the state to meet specified revenue conditions in the prior year. For multi-year planning, model the current-year rate plus a sensitivity scenario at 2.9%.

Do I need an Indiana-licensed attorney for my Indiana 1031 closing?

Not statutorily — Indiana is not an attorney-state for closings, and title companies handle most closings without attorney supervision. For straightforward Indianapolis or Fort Wayne transactions, your QI plus a competent title company is the standard team. For larger institutional transactions, complex partnership structures, or the LEAP District / Boone County / specialized industrial deals, retain Indianapolis counsel familiar with Indiana real property and tax law. Secondary-market attorneys handle 1031 work less frequently than the Indianapolis CRE bar.