Kluyveromyces lactis hAT-transposase 1 (Kat1) generates hairpin-capped DNA double strand breaks leading to MAT-switching (MATa to MATα). 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.