Adeno-associated viral (AAV) vectors have emerged as the leading gene delivery platform for gene therapy and vaccination. Three AAV-based gene therapy drugs, Glybera, LUXTURNA, and ZOLGENSMA were approved between 2012 and 2019 by the European Medicines Agency and the United States Food and Drug Administration as treatments for genetic diseases hereditary lipoprotein lipase deficiency (LPLD), inherited retinal disease (IRD), and spinal muscular atrophy (SMA), respectively. Despite these therapeutic successes, clinical trials have demonstrated that host anti-viral immune responses can prevent the long-term gene expression of AAV vector-encoded genes. Therefore, it is critical that we understand the complex relationship between AAV vectors and the host immune response. This knowledge could allow for the rational design of optimized gene transfer vectors capable of either subverting host immune responses in the context of gene therapy applications, or stimulating desirable immune responses that generate protective immunity in vaccine applications to AAV vector-encoded antigens. This review provides an overview of our current understanding of the AAV-induced immune response and discusses potential strategies by which these responses can be manipulated to improve AAV vector-mediated gene transfer.