1031 Exchange in Indiana

By Skyline Capital Investments · Updated October 26, 2026 · 7 min read

Does Indiana recognize 1031 exchanges?

Yes. Indiana income tax starts from federal adjusted gross income, and gain deferred in a valid 1031 exchange never reaches that figure, so it is deferred for Indiana too. Senate Bill 243, signed March 5, 2026, updated IC 6-3-1-11 so Indiana now follows the Internal Revenue Code as in effect on January 1, 2026.

The county income tax follows the same base. Each Indiana county’s local income tax is figured on a resident’s Indiana adjusted gross income, so the exchange defers it as well. For an Allen County owner, that is 2.95% to the state plus 1.59% to the county, or 4.54% of the deferred gain.

Federal 1031 rules that apply in Indiana

Indiana adds no deadlines of its own. You have 45 days from the sale closing to identify replacement property in writing and 180 days, or your tax return due date if earlier, to acquire it. Both properties must be real property held for business or investment use, and a qualified intermediary must hold the proceeds so you never have actual or constructive receipt.

To defer all of the gain, buy replacement property worth at least your net sale price and reinvest all of the net cash. Cash you keep is boot. So is debt paid off at closing that you don’t replace with new debt or added cash. Our 1031 exchange rules guide covers identification and boot in detail, and the main 1031 exchange guide walks through an exchange from listing to closing.

Does Indiana have a 1031 clawback?

No. Indiana does not track deferred gain once you exchange into another state. The states that do are California, Massachusetts, Montana and Oregon. An owner who sells in Fort Wayne and buys in Columbus, Ohio or Nashville has no annual Indiana form to file for the out-of-state replacement.

If you still live in Indiana when you later sell the replacement in a taxable sale, the gain is taxed as part of your Indiana income that year, with your county rate on top. If you have moved away by then and the replacement is outside Indiana, Indiana has no rule that reaches back for the deferred gain.

The rule runs the other way for buyers coming into Indiana. An investor who sold in California or Oregon and buys an Indiana building as the replacement still owes that state’s tracking filings, so if you sell to an exchange buyer from one of those states, the paperwork is theirs.

Indiana withholding at closing and how an exchange affects it

We found no Indiana rule requiring a title company to withhold income tax from an individual seller’s proceeds. Nonresidents still owe tax on any gain they recognize, because IC 6-3-2-2 counts income from real property located in Indiana as Indiana-source income.

Entities are different. Under the Department of Revenue’s Information Bulletin #72, partnerships, S corporations and trusts must withhold Indiana tax for nonresident owners and file a composite return on their behalf. A full exchange keeps the deferred gain out of that base, because deferred gain is not in federal or Indiana adjusted gross income. Only recognized gain, such as cash boot or mortgage boot, flows through to the nonresident members and the withholding.

• Tell the title company and your intermediary at the start that the sale is part of an exchange.
• If an LLC or partnership sells, have the CPA confirm what recognized gain, if any, reaches nonresident members.
• Keep the Indiana depreciation schedule in the exchange file, since Indiana basis differs from federal when bonus depreciation was taken.

Bonus depreciation and your Indiana basis in an exchange

Indiana does not follow federal bonus depreciation. Under IC 6-3-1-3.5, owners adjust Indiana income to reflect depreciation as if no Section 168(k) election had been made, and Section 179 expense above $25,000 is added back. The Department of Revenue’s Information Bulletin #119 confirms the disallowance applies to qualified improvement property too.

In an exchange, your basis carries over to the replacement property, and so does the gap between your federal and Indiana basis. If you used cost segregation and bonus depreciation on the building you sell, keep tracking the Indiana numbers on the replacement. When you eventually sell in a taxable sale, the Indiana gain will be figured from the higher Indiana basis. Make sure your preparer carries both schedules forward so the difference is not lost.

Does Indiana regulate qualified intermediaries?

No. Indiana is not one of the nine states with laws governing exchange intermediaries, which are California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia and Washington. No Indiana statute requires an intermediary to post a bond, carry insurance or keep exchange funds in a separate account.

Your protection comes from the exchange agreement and from choosing the intermediary carefully. The funds can sit with it for up to 180 days.

• Ask whether your funds go into a separate account in your name or a pooled account.
• Ask whether withdrawals need your signature as well as the intermediary’s.
• Ask for proof of a fidelity bond and errors and omissions coverage, and the amounts.
• Confirm the intermediary is not a disqualified person, such as your attorney, CPA, employee or broker within the past two years.

Common 1031 exchange paths for Indiana owners

Indiana to Indiana is the most familiar path: trading several small buildings in one market for a larger property in Indianapolis or its northern suburbs. There are no state filings beyond the normal Indiana return. Remember that the replacement’s assessed value will move toward its price through annual trending, and the property tax on apartments is capped at 2% of gross assessed value, so model the tax at that cap if the district rate is high.

Indiana to out of state is common for owners moving toward Sun Belt markets or toward a state where they plan to retire. Indiana places no filing burden on it. Check the destination state’s rules on withholding and future sales instead.

Owners who want to stop managing property sometimes buy a Delaware statutory trust interest, which can qualify as replacement real property. Our page on 1031 exchanges into a DST covers how that works.

Worked example: a Fort Wayne exchange into Tennessee

An owner living in Allen County sells a 40-unit building in Fort Wayne for $2,600,000. After $120,000 of selling costs and with an adjusted basis of $1,000,000, the gain is $1,480,000. The $1,100,000 mortgage is paid at closing, leaving $1,380,000 of net proceeds. The owner takes $100,000 in cash and the intermediary holds $1,280,000.

Within 180 days the owner buys a $2,800,000 building in Nashville with the $1,280,000 of exchange funds and a new $1,520,000 loan. The new loan is larger than the old one, so there is no mortgage boot. The $100,000 of cash is the only boot, so $100,000 of gain is recognized and $1,380,000 is deferred.

Indiana tax on the boot is $2,950 at 2.95%, and Allen County adds $1,590 at 1.59%. The Indiana and county tax deferred is $62,652. Had the owner left all $1,380,000 with the intermediary, the full $1,480,000 would be deferred, holding back $67,192 of Indiana and Allen County tax, and the owner would file nothing extra with Indiana for the Tennessee building.

Partial exchanges and boot in Indiana

Indiana taxes a partial exchange the way the IRS does: you pay tax on the boot and defer the rest. What Indiana adds is the county layer, so every $100,000 of boot costs an Allen County resident $4,540 of state and county tax before the federal tax on the same amount.

Debt counts as boot as well as cash. Suppose the Fort Wayne owner instead bought a $2,280,000 building with the same $1,280,000 of exchange funds and a $1,000,000 loan. The $1,100,000 mortgage paid off would be replaced by only $1,000,000 of new debt, so $100,000 of mortgage boot joins the $100,000 of cash. Recognized gain rises to $200,000, and the Indiana and county tax on it to $9,080. Borrowing at least as much as the old loan, or adding cash, avoids that.

Timeline tips for an Indiana exchange

Line up replacement candidates before you list, especially if you are buying in a new metro. The 45 days start at closing and do not pause for weekends or holidays.

• Sign the exchange agreement and assign the sale contract before closing.
• If you sell late in the year, extend your return so the due date does not cut the 180 days short.
• Check which county you will live in on January 1 of the sale year, since that sets the county rate on any boot.
• If you buy in Indiana, ask for the replacement’s last three tax bills and its gross assessed value so you can see how close it already is to the 2% cap.

Selling an Indiana apartment building as part of an exchange

Skyline buys apartment buildings with five or more units in Indiana. We buy directly, close on your timeline, and can work inside 1031 deadlines. We can sign the assignment to your intermediary and set a closing date that gives you time to find the replacement before your 45 days begin.

For the tax you would owe without an exchange, see Indiana capital gains tax on real estate. The 1031 exchange calculator runs the federal numbers for your own sale.