Adeno-associated virus (AAV) is a small human Dependovirus whose low immunogenicity and capacity for long-term persistence have led to its widespread use as vector for gene therapy. Despite great recent successes in AAV-based gene therapy, further improvements in vector technology may be hindered by an inadequate understanding of various aspects of basic AAV biology. AAV is unique in that its replication is largely dependent on a helper virus and cellular factors. In the absence of helper virus coinfection, wild-type AAV establishes latency through mechanisms that are not yet fully understood. Challenging the currently held model for AAV latency, we show here that the corepressor Krüppel-associated box domain-associated protein 1 (KAP1) binds the latent AAV2 genome at the rep ORF, leading to trimethylation of AAV2-associated histone 3 lysine 9 and that the inactivation of KAP1 repression is necessary for AAV2 reactivation and replication. We identify a viral mechanism for the counteraction of KAP1 in which interference with the KAP1 phosphatase protein phosphatase 1 (PP1) by the AAV2 Rep proteins mediates enhanced phosphorylation of KAP1-S824 and thus relief from KAP1 repression. Furthermore, we show that this phenomenon involves recruitment of the NIPP1 (nuclear inhibitor of PP1)-PP1α holoenzyme to KAP1 in a manner dependent upon the NIPP1 FHA domain, identifying NIPP1 as an interaction partner for KAP1 and shedding light on the mechanism through which PP1 regulates cellular KAP1 activity.