1031 Exchange in Illinois
Illinois follows federal 1031 exchange rules and has a flat state income tax rate of 4.95%. The state does not impose withholding on non-resident sellers of real estate and has no clawback rule for gain deferred into out-of-state property. Investors should factor in Illinois's real estate transfer taxes (state, county, and in some municipalities local) and property tax rates that are among the highest in the nation when evaluating replacement properties.
Fast Facts
- State Income Tax on Capital Gains
- 4.95% (flat rate). Illinois taxes capital gains as ordinary income at its flat 4.95% individual income tax rate, which can be deferred through a qualifying 1031 exchange.
- Conforms to Federal 1031
- Yes. Illinois starts from federal adjusted gross income and makes no modification for Section 1031 gain, so an exchange that is valid at the federal level defers Illinois income tax as well.
- Non-Resident Withholding
- None. Illinois does not impose income tax withholding at closing on non-residents selling real property, making the process simpler for out-of-state investors.
- Real Estate Transfer Tax
- $0.50 per $500 of value (state), plus $0.25 per $500 (county) and additional local transfer taxes in some municipalities. Transfer taxes apply to 1031 exchange transactions like any other sale.
- Property Tax Rates
- Varies by county; Illinois's average effective property tax rate is roughly 2%, second-highest in the nation per the Tax Foundation, with significant variation by county and municipality.
Legal and Tax Considerations
State Income Tax on Capital Gains
4.95% (flat rate). Illinois taxes capital gains as ordinary income at its flat 4.95% individual income tax rate, which can be deferred through a qualifying 1031 exchange.
Conforms to Federal 1031
Yes. Illinois starts from federal adjusted gross income and makes no modification for Section 1031 gain, so an exchange that is valid at the federal level defers Illinois income tax as well.
Non-Resident Withholding
None. Illinois does not impose income tax withholding at closing on non-residents selling real property, making the process simpler for out-of-state investors.
Real Estate Transfer Tax
$0.50 per $500 of value (state), plus $0.25 per $500 (county) and additional local transfer taxes in some municipalities. Transfer taxes apply to 1031 exchange transactions like any other sale.
Property Tax Rates
Varies by county; Illinois's average effective property tax rate is roughly 2%, second-highest in the nation per the Tax Foundation, with significant variation by county and municipality.
Required Documentation
- Federal Form 8824
- Illinois Schedule NR (for non-residents)
- Complete closing statements for both properties
- Qualified Intermediary agreement
Clawback Rule
None
Step-by-Step Process
- 1
Identify Replacement Property
You must identify potential replacement properties within 45 days of selling your relinquished property. In Illinois, consider property tax variations by county and local transfer taxes when identifying properties.
- 2
Engage a Qualified Intermediary
Work with a qualified intermediary to handle the exchange funds and documentation before closing on the sale of your relinquished property. Illinois does not impose a state licensing or registration regime specific to exchange facilitators, so vet your QI's bonding, insurance, and track record carefully.
- 3
Close on Replacement Property
Complete the purchase of your replacement property within 180 days of selling your relinquished property. Be aware of Illinois's real estate transfer taxes (state, county, and any municipal), which will apply to the transaction.
- 4
File Tax Returns
Report your 1031 exchange on your federal tax return using Form 8824 and on your Illinois state tax return. Non-residents should file Illinois Schedule NR to report Illinois-source income.
- 5
Property Tax Considerations
Illinois has some of the highest property tax rates in the nation — a roughly 2% average effective rate per the Tax Foundation — with significant variation by county and municipality. When selecting replacement properties, research local property tax rates and reassessment history (Cook County reassesses on a triennial cycle), as these can significantly impact your returns.
- 6
Local Transfer Taxes
In addition to the state transfer tax of $0.50 per $500 of value and the county tax of $0.25 per $500, some Illinois municipalities impose additional transfer taxes. Chicago's combined municipal rate is $5.25 per $500 of value ($3.75 per $500 paid by the buyer plus a $1.50 per $500 CTA portion paid by the seller). Factor these costs into your exchange calculations.
Timeline Calculator
Enter the closing date of your relinquished property to calculate your 1031 exchange deadlines:
Common Pitfalls
Underestimating property tax impact
Issue
Illinois has some of the highest property tax rates in the nation, which can significantly impact investment returns if not properly factored into financial projections.
Prevention
Research property tax rates in specific counties and municipalities before identifying replacement properties. Review historical reassessment patterns, particularly in Cook County with its triennial reassessment cycle. Consider budgeting for potential increases in property taxes when calculating projected returns.
Overlooking local transfer taxes
Issue
In addition to the state and county transfer taxes, some Illinois municipalities impose additional transfer taxes that can significantly increase transaction costs.
Prevention
Research local transfer tax rates in the specific municipality where you're considering purchasing replacement property. For example, Chicago's combined municipal rate of $5.25 per $500 of value is much higher than the state rate of $0.50 per $500. Factor these costs into your exchange calculations.
Ignoring local landlord-tenant regulations
Issue
Chicago has specific landlord-tenant ordinances that impose additional requirements beyond state law, which can impact property management and returns.
Prevention
If investing in Chicago residential property, familiarize yourself with the Residential Landlord and Tenant Ordinance (RLTO) and its requirements regarding security deposits, disclosures, and maintenance. Consider consulting with a property management company experienced with Chicago's regulations.
Frequently Asked Questions
Does Illinois conform to federal 1031 exchange rules?
Yes. Illinois income tax starts from federal adjusted gross income and makes no addback for gain deferred under Section 1031, so a valid federal 1031 exchange also defers Illinois income tax. The deferred gain remains taxable when it is eventually recognized for federal purposes.
What is Illinois’s state income tax rate on capital gains?
Illinois imposes a flat state income tax rate of 4.95% on all income, including capital gains, which can be deferred through a qualifying 1031 exchange.
Does Illinois have any special withholding requirements for non-residents selling real estate?
No. Illinois does not impose income tax withholding at closing on non-residents selling real property, making the process simpler for out-of-state investors engaging in 1031 exchanges.
How do property taxes in Illinois compare to other states?
Illinois has among the highest property tax rates in the nation — an average effective rate of roughly 2%, second only to New Jersey in recent Tax Foundation rankings — with significant variation by county and municipality. This is an important consideration when evaluating replacement properties for a 1031 exchange.
Major Cities
Chicago, Aurora, Naperville, Joliet, Rockford, Springfield, Peoria, Elgin, Waukegan, Champaign, Bloomington, Decatur, Evanston, Schaumburg, Arlington Heights
References
Official References
- Illinois Department of Revenue — Income Tax Rates
- Illinois Department of Revenue — Real Estate Transfer Tax
- IRS — Like-Kind Exchanges Under IRC Section 1031
- Tax Foundation — Property Taxes by State and County
This information is for educational purposes only and is not legal or tax advice. Consult with qualified professionals regarding your specific situation.