Kluyveromyces lactis hAT-transposase 1 (Kat1) generates hairpin-capped DNA double strand breaks leading to MAT-switching (MATa to MAT alpha). Using purified Kat1, we demonstrate the importance of terminal inverted repeats and subterminal repeats for its endonuclease activity. Kat1 promoted joining of the transposon end into a target DNA molecule in vitro, a biochemical feature that ties Kat1 to transposases. Gas-phase Electrophoretic Mobility Macromolecule analysis revealed that Kat1 can form hexamers when complexed with DNA. Kat1 point mutants were generated in conserved positions to explore structure-function relationships. Mutants of predicted catalytic residues abolished both DNA cleavage and strand-transfer. Interestingly, W576A predicted to be impaired for hairpin formation, was active for DNA cleavage and supported wild type levels of mating-type switching. In contrast, the conserved CXXH motif was critical for hairpin formation because Kat1 C402A/H405A completely blocked hairpinning and switching, but still generated nicks in the DNA. Mutations in the BED zinc-finger domain (C130A/C133A) resulted in an unspecific nuclease activity, presumably due to nonspecific DNA interaction. Kat1 mutants that were defective for cleavage in vitro were also defective for mating-type switching. Collectively, this study reveals Kat1 sharing extensive biochemical similarities with cut and paste transposons despite being domesticated and evolutionary diverged from active transposons.