Capital gains tax in Indiana (2026): selling a business, real estate or farm

The January 1 county rule is the Indiana lever most sellers miss

Every one of Indiana's 92 counties levies its own income tax, and it applies to capital gains the same way it applies to a paycheck. Departmental Notice #1 (effective Oct. 1, 2026) states the rule plainly: your county of residence is fixed on January 1 of the calendar year in which your tax year begins. A sale that closes in November is taxed at the rate of the county you lived in the previous New Year's Day.

The spread is real. Under that 2026 notice, Porter County is 0.5%, Hamilton County 1.10%, Marion County 2.02% and Randolph County 3.0%. A seller who genuinely moves from Marion to Hamilton County before January 1 of the closing year cuts the local layer on the whole gain by close to one percentage point. The move must be a real change of home, and county rates can change in January and October (Indiana DOR, 2026).

What the 2.95% state rate does to a 2026 sale

Indiana has no capital gain deduction or exclusion. Long-term gain, short-term gain, Section 1245 recapture and goodwill all flow from federal adjusted gross income into the same 2.95% rate for 2026, stepping to 2.90% in 2027 under the phase-down the Department of Revenue publishes. In the first worked example, a couple selling a business for a $2.8 million gain owes $82,600 to the state, $601,475 in federal income tax and $104,500 of net investment income tax, a total of $788,575 caused by the sale.

For the federal side in one line: long-term gains are taxed at 0%, 15% or 20%, with 20% starting above $613,700 of joint taxable income in 2026 (Rev. Proc. 2025-32), and the long-term capital gains guide covers the rest. Add your county rate to the Indiana figure above; in Marion County that is another 2.02% of the gain under the October 2026 notice.

Bonus depreciation add-backs come back to you at closing

Indiana does not follow federal bonus depreciation and caps Section 179 expensing at $25,000 (Information Bulletin #118, May 2026). Owners who expensed assets federally have been adding the difference back for years. The payoff comes at the sale: Bulletin #118 has the seller report the gap between federal and Indiana depreciation as a negative adjustment in the year of disposition.

The bulletin's own example: property bought for $1,000,000 and fully expensed federally, with $625,000 of cumulative Indiana depreciation at the sale, produces a $375,000 subtraction. The federal recapture is larger than the Indiana recapture, so pull your Indiana depreciation schedule before you price the deal, and see depreciation recapture and purchase price allocation for how the allocation drives it.

Spreading the gain with an Indiana installment sale

Because Indiana starts from federal adjusted gross income, a Section 453 installment sale (IRC 453) moves the Indiana tax into the years you are paid. The second example spreads the same sale over four years: the total tax caused falls to $693,297, which is $95,279 less than the one-year cash sale, mostly because more of the gain stays below the 20% federal bracket. Indiana's own share barely moves ($81,663 versus $82,600), helped slightly by the 2.90% rate scheduled for 2027.

Two Indiana details matter on a note. Each year's county tax follows your January 1 county for that year, so a move after closing changes the local rate on later payments. And recapture is reported in the year of sale regardless of when cash arrives. The seller financing page covers down payments, liens and personal guarantees that protect the note.

Farms, rentals and operating businesses in Indiana

Indiana gives farmland no special exclusion, so a land sale is taxed at the same 2.95% (2026) as stock. The federal side differs by asset: farmland is usually Section 1231 gain, raised breeding stock can qualify too, and an active farmer may avoid the 3.8% net investment income tax (IRC 1411) on land used in the operation. See capital gains tax on farmland.

Rental property adds unrecaptured Section 1250 gain, capped at 25% federally but taxed at the ordinary Indiana rate; see capital gains tax on rental property. Operating businesses: see capital gains tax on the sale of a business.

Nonresident sellers, heirs and leaving the state

A nonresident who sells Indiana real estate or business property owes Indiana tax on that gain. County tax reaches a nonresident only if his principal place of work or business was in an Indiana county on January 1 (Departmental Notice #1, 2026). Gain on stock or a partnership interest generally follows the owner's residence, which is why some owners weigh moving before the sale; Indiana land and buildings stay Indiana-source wherever you live.

Heirs face no Indiana death tax: the legislature repealed the inheritance tax for deaths after Dec. 31, 2012 (Indiana DOR). Inherited property also gets a federal basis step-up, so holding until death can erase built-in gain; see step-up at death. Neighboring options are on the Illinois and Ohio pages.

Hans studies the tax side of big Indiana sales and models county, state, federal and timing together. Get the Big Sale Tax Analysis.

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