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A little clarity for your next decision.
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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
An Indiana 1031 exchange can defer federal gain when qualifying investment or business real estate is exchanged for qualifying replacement property. Your plan also needs to cover state and county taxes, property-tax bills, rental rules, and site risks. This guide explains those checks and how to compare direct property with a Delaware statutory trust, or DST.
I would first ask why you want to sell. Perhaps a rental takes too much work, a farm no longer fits the family plan, or a single tenant accounts for too much of your income. Those are different problems. A sound exchange should address your problem rather than simply replace one deed with another.
Federal Section 1031 covers real estate held for business or investment that meets its rules. It does not generally cover a personal home, inventory, or property held mainly for sale. Qualifying U.S. real estate can be exchanged across state lines and across property types. In most cases, the tax history carries into the replacement. The gain does not vanish. [1]
Choose your qualified intermediary and complete the exchange documents before the sale closes. In a typical deferred exchange, written identification is due within 45 days. You must receive the replacement by the earlier of 180 days or the federal return due date, including extensions. The periods run together, and limits on identification and control of proceeds still apply. [2]
Have your CPA and lawyer review the owner shown on the deed. A property held by a partnership can raise different questions from one held by an individual or a disregarded LLC. Do not assume each family member can take a share of the proceeds and carry out a separate exchange without advance planning.
Indiana's individual adjusted gross income tax rate is 2.95% for 2026. The Department of Revenue lists 2.90% for 2027. County income taxes are separate, and county rates may change in January or October. Use the right year and filing rules. A rate found in an older article may be wrong. [3]
As a narrow example, $300,000 of additional income subject to the 2026 state rate produces $8,850 before credits or other adjustments. That is not a full tax estimate for a $300,000 gain. It leaves out federal and county tax, your other income, and the way the gain is reported.
A useful tax estimate starts with sale price, selling costs, adjusted basis, and depreciation records. It then separates cash paid to you from funds kept in the exchange. Your loan payoff changes how much cash remains, but it does not by itself define taxable gain. Ask for a clear bridge between these figures.
Compare the taxable-sale estimate with the proposed exchange on the same assumptions. Also ask about state basis differences and any cash or other property received. Find out what tax may be deferred and what may still be due. Then set aside the cash you need outside the replacement.
Indiana's rules for owners who live elsewhere cover income and gain from a business that holds property in the state and collects its income. They also explain how pass-through owners can report through a group, or composite, return. Living elsewhere does not by itself remove Indiana-source income from the review. Have the preparer decide which return and owner rules apply. [4]
Local income tax needs a separate analysis. Indiana generally uses January 1 to fix your home county and the county of your main work or business. For an out-of-state resident, county tax can apply when the principal business or employment is in an Indiana county. The state's bulletin also covers other income from that county. This can include gain from property sales. [5]
That is why I would not simply attach the property's county rate to every seller's gain. Nor would I assume that living across the state line removes all local tax. Give the CPA your January 1 address, work and business locations, ownership structure, and the source of each income item.
If you own in several counties, keep a separate schedule for each property. Show rent, expenses, sale dates, and the entity that owns each asset. Good records help you separate the tax result from the cash you have to invest. A blended estimate with no explanation can hide a costly assumption.
Indiana's property-tax system generally caps covered taxes at 1% of gross assessed value for homesteads, 2% for other residential property and agricultural land, and 3% for other property. Credits apply these limits to the bill. They do not create one flat local tax rate. The bill still starts with assessed value, deductions, and the local rate. [6]
The state also warns that taxes approved by referendum can cause a bill to exceed those caps. Ask for the actual parcel bill and applicable referendum charges. A statement that “rentals are capped at 2%” is not a complete operating budget. [7]
For a hypothetical rental with $500,000 of gross assessed value, the 2% figure is $10,000. It does not prove that the next bill will equal $10,000 or never exceed it. Confirm the assessed value, category, deductions, credits, and charges outside the limit before using that amount.
Request at least the recent bills, the current assessment notice, and the property record card. Compare unit count, building size, use, and parcel boundaries with what you are buying. Check who pays each installment under the contract. The seller's last bill and the buyer's first full year can be different.
Indiana's May 2026 guidance confirms a phased deduction for eligible property in the 2% cap categories. It is 6% for the 2025 assessment payable in 2026 and 12% for the 2026 assessment payable in 2027. The deduction applies after other deductions, and the county auditor applies it without a separate application. It covers eligible rentals, long-term care property, and farm land in those categories. [8]
Keep the assessment year and payment year in separate columns. “2026 taxes” can mean two different things in a conversation. Have the county confirm which cycle appears in the estimate. Do not apply a new deduction to the wrong year's assessed value or count it twice.
The same guidance addresses loss of homestead eligibility. Under that rule, an owner who no longer qualifies must tell the auditor within 60 days. A rental buyer should not assume the seller's owner-occupied deductions belong in the future budget. Review the actual use and required notice with the county. [8]
I would keep an expected bill and a higher-cost case. The higher case might reflect a value change, a lost benefit, or an unresolved assessment issue. Label the reason. That is more useful than adding a random cushion and hoping it covers every change.
The state certified a $2,120-per-acre agricultural base rate for the January 1, 2026 assessment date. This is part of an assessment method based on productive use, with further land adjustments. It is not a claim that Indiana farmland sells for $2,120 per acre, or that every acre has that final assessed value. [9]
For a farm purchase, obtain the assessment worksheet, soil data, acreage breakdown, drainage records, and lease. Separate tillable acres from roads, woods, home sites, and other areas. The deed's total acreage alone will not tell you what earns rent or what supports the planned use.
Ask who pays drainage assessments and major tile repairs. Review access for farm equipment and any rights held by neighbors or utilities. If a solar or other development proposal is part of the pitch, separate signed agreements from hopes. A possible future use is not today's rent.
Put the crop and lease calendar beside the exchange calendar. Confirm the tenant's rights, rent collection, crops in the ground, and any prepaid expenses with counsel. A closing date should not be used as a guess about when you may change the operator or start a different use.
Indiana's Department of Local Government Finance provides the current sales disclosure form and separate addenda for agricultural or residential property and commercial or industrial property. It directs users to the county assessor for filing instructions. Use the current form package for the actual conveyance, rather than an old sample saved with another deal. [10]
Have the closing team match the reported price and parcel list to the contract. A transaction may include equipment, several parcels, a business, or seller financing. Those details should be handled consistently across the deed, disclosure, closing statement, and tax records. Ask which fees apply rather than assuming that one recording charge covers everything.
The buyer should receive a clean file of leases, service contracts, warranties, permits, and keys as well as title documents. Agree on who sends tenant notices and when rent payments change hands. A good handoff prevents ordinary operating problems from consuming the first month of ownership.
Indiana's 2026 housing-agency manual summarizes the state deposit rule: after the rental ends, the owner generally has 45 days to send the required itemized charges and any remaining deposit. The tenant must supply a forwarding address in writing before the landlord's liability period starts. Check which charges are allowed and what records support them. Ordinary wear is not tenant damage. [11]
If tenants remain, match each lease to its deposit balance and move-in report. List pending refunds and damage claims. Have counsel confirm how the deposit duties and funds pass to the buyer. Do not treat a tenant's deposit as free cash to fund repairs after closing.
If the property has tax-credit or other housing restrictions, request that separate compliance file. Rent limits, income certifications, and recorded agreements are not established by a standard rent roll. The same state manual contains program rules, but those rules should not be applied to ordinary market-rate housing just because they appear in the same document.
Crawfordsville requires annual rental registration by January 31 or within 30 days of obtaining title. Its program also calls for routine inspections, with specified exceptions. The city says registration alone does not establish that units meet building and fire rules; an inspection certificate is a separate matter. [12]
South Bend's current registration page sets an October 1, 2026 deadline and waives its registration fee for 2026. On renewal, owners must add every property they still rent. Only listed properties remain in that renewal. Those are current local instructions, not a statewide deadline or a promise that future-year fees stay waived. [13]
Start with the property's legal address and the town or county that oversees it. Ask the local office what must be registered, transferred, renewed, or inspected. Obtain open violation records and proof that earlier work was completed. A seller's portal screenshot may show an application rather than a final approval.
This matters when evaluating a plan to add bedrooms or split units. Existing rent does not prove that the current layout is lawful. Confirm permitted use and occupancy before counting extra income. Put the cost and time for any needed approval into the investment case.
The Indiana Brownfields Program says a Comfort Letter is not a legal release from liability and is not transferable to another entity. It explains the exemption or enforcement policy that applies to the requesting party. A Site Status Letter has a different purpose: it addresses site conditions, not that party's potential cleanup liability. The program advises allowing at least 120 days after it receives all needed records for a requested letter. [14]
Review former industrial and service sites early. Bring in an environmental lawyer and site expert before you plan new uses. Ask what protection the buyer needs and what must happen before acquisition. Do not assume a letter in the seller's file can simply be renamed after closing. The federal exchange clock will not make missing site work less important.
Environmental restrictive covenants are different again. Indiana says these recorded restrictions run with the land and bind later owners. They can impose use limits and ongoing duties, and the recorded files are available through the state's registry and Virtual File Cabinet. [15]
Read the actual covenant and compare it with the proposed use. Ask who maintains any controls, what reports are due, and whether a planned renovation is allowed. A low price may reflect these limits. They can also affect rent, loans, and who might buy the property later.
Indiana's Floodplain Analysis and Regulatory Assessment explains that permit findings depend on the point selected on the map. Its instructions call for another assessment where the area of interest crosses different flood-hazard zones. The report also explains separate state and local permit questions and project exemptions. It helps flag issues. It does not give you permission to build. [16]
Check the building, planned addition, parking, and access road. A marker on the front door may miss a low approach road or a stream behind the warehouse. Ask about prior water entry and drainage work, then obtain property-specific insurance quotes. Keep premium, deductible, and lost-rent assumptions separate.
Indiana's current water-quality plan also describes karst in the south-central and southeastern parts of the state. Openings in this landscape can move polluted surface water into groundwater with little soil filtering. For a site in such an area, confirm the actual geology, water source, and sewage plan with qualified local professionals. [17]
For commercial property using onsite sewage, the Department of Health maintains a database of plan and soil reviews. Use it with the approved plans and local records to check the system's status. An existing tank does not establish capacity for a new restaurant, more tenants, or a different use. [18]
Consider a hypothetical Indiana rental with $216,000 in collected annual rent. Assume $90,000 in operating costs, $66,000 in debt payments, and $18,000 in capital reserves. That leaves $42,000 before owner income taxes, or $3,500 a month. With $700,000 of cash invested, that is a 6% cash-on-cash result.
If vacancy and repairs cost another $14,000, annual cash falls to $28,000, or about $2,333 a month and 4% of invested cash. These are invented inputs, not market forecasts. Their purpose is to show how a few expense changes can affect the income you actually rely on.
A qualifying DST can provide replacement real estate under the limited structure in IRS Revenue Ruling 2004-86. The ruling restricts the trustee's powers. It does not approve every trust or say an offering is a good investment. [19]
Compare sponsor fees, property debt, reserves, lease risks, and the exit plan with direct ownership. Private placements may offer less disclosure than registered securities and may be hard to sell. An exemption from registration is not government approval. [20]
I would put keeping the property with paid management, buying a replacement, and using qualifying passive investments on the same page. Use the same income need and holding period. More convenience can be valuable, but it should be weighed against lost control, fees, and limits on access to your money.
Yes. Qualifying U.S. investment or business real estate can meet the federal like-kind rule across state lines. The ownership, use, timing, and proceeds rules still apply. [1] [2]
Yes, for the state adjusted gross income tax. County tax may also apply, and entity tax treatment needs separate review. A sale-price percentage is not a full estimate of tax on gain. [3]
Do not assume that. The local tax rules examine January 1 residence and principal business or employment, among other facts. Give the preparer those details instead of selecting a rate from the street address alone. [5]
No. Assessed value, deductions, local rates, and credits affect the bill. Referendum taxes can cause the amount due to exceed the cap. Review the parcel's actual records. [6] [7]
Not as your own transferable protection. Indiana says a Comfort Letter is not transferable and is not a legal release. Have your advisers review the buyer's protection and continuing duties before closing. [14]
No. Cash payments and property values can change, and selling a private interest may be difficult. Review the actual offering and whether its risks fit your needs. [20]
Keep the tax estimate, exchange dates, property-tax schedule, lease summary, permit records, and site review together. List each unresolved item with a person and date for resolving it. That makes a proposed replacement easier to compare and helps prevent a deadline from becoming the only reason to buy.
This guide is educational and is not tax or legal advice for your transaction. It does not identify available offerings or promise returns. Your CPA and attorney should confirm the tax and legal plan. I can help you work through the investment choices and decide which tradeoffs make sense for your needs.
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
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