Indiana SB 1 Brings Major Property Tax Reforms – With Potential Local Income Tax Consequences

Indiana Gov. Mike Braun identified property tax reform as a top priority upon taking office, and with the signing of Senate Bill 1 (SB 1) this week, that priority has now become reality. The new legislation introduces several significant changes to Indiana’s property tax structure, while also granting local governments new authority to impose local income taxes to address anticipated revenue shortfalls.

Key Property Tax Changes for Businesses and Property Owners

The new legislation could affect businesses, developers, property owners, and local governments across the state. While full implementation guidance is still forthcoming, highlights include:

• Business personal property exemption increase: The exemption threshold for business personal property will increase from $80,000 to $1,000,000 in taxable cost per county for the Jan. 1, 2025, assessment. This threshold will rise again to $2,000,000 for the Jan. 1, 2026, assessment.
• Phase-out of the 30% depreciation floor: The longstanding 30% floor for depreciated property will be phased out for equipment installed after Jan. 1, 2025. Notably, this change does not apply to property located within existing tax increment financing (TIF) districts.
• New deduction for 2% tax cap properties: Residential non-homestead properties subject to the 2% property tax cap will benefit from a new deduction – beginning at 6% of assessed value in 2025 and gradually increasing to 33.4% by 2030. If property is located in a TIF district, adjustments may be made to base assessed value in an attempt to neutralize the impact of the changing tax rates.
• Homestead deduction changes: The standard homestead deduction will be gradually reduced, starting at $48,000 in 2025 and phasing out entirely by 2030. The supplemental homestead deduction will increase from 37.5% to 40% in 2026, with annual increases to 66.7% by 2030.
• New homestead tax credit: A new 10% tax credit will apply to homestead property taxes owed, capped at $300.
• Over-65 exemption update: Eligibility criteria for the over-65 exemption have been updated. Qualifying homeowners will receive a $150 tax credit, beginning with taxes payable in 2026.
• Agricultural land base rate Adjustment: The capitalization rate used to calculate the statewide agricultural land base rate has been amended, impacting how agricultural land is assessed for tax purposes.
• Property tax referenda ballot timing: Property tax referenda can now only appear on general election ballots, streamlining when voters can weigh in on proposed tax increases.

New Local Income Tax Options

As property taxes decrease, local governments may face challenges in maintaining services. SB 1 introduces new income tax tools for counties and municipalities to bridge those revenue gaps, including:

• Replacement tax (effective July 1, 2025): Counties are authorized to impose a tax to fund the new homestead credit. The tax is capped at 0.3% and currently set to expire as of Dec. 31, 2027. The replacement tax appears to be in addition to any current state or county income tax.
• Amended county income tax (effective July 1, 2027): The maximum county income tax is increased to 2.9%, up from 2.5% in all counties other than Marion County, which is 2.75%. The county income tax appears to be imposed on residents and nonresidents not otherwise subject to a county tax that are working in the county. 
• New local municipality income tax (effective July 1, 2027): Municipalities may now impose a local income tax on residents not to exceed 1.2%.

There are some nuanced restrictions on the imposition of the county rate to account for the potential municipal income tax so that the total local rate – county and municipal – cannot exceed the maximum 2.9%.

What’s Next?

While SB 1 includes immediate property tax relief, it also sets the stage for potential increases in local income taxes as early as 2025. Local governments across Indiana are now evaluating how these changes will affect budgets, services, and development plans.

The Indiana Department of Local Government Finance and other state agencies are expected to issue further guidance in the months ahead. Businesses and property owners should begin assessing the long-term financial implications of SB 1, particularly as they relate to investment planning, site selection, and cost modeling.

KSM is closely monitoring the implementation of SB 1 and its impact on property and local income taxation in Indiana. Thus, if you have questions about how it may impact your business, development project, or community, reach out to your KSM advisor or fill out the form below.