Illinois follows federal 1031 exchange rules with a 4.95% state income tax rate and no special withholding requirements for non-residents.
This information is for educational purposes only and is not legal or tax advice. Consult with qualified professionals regarding your specific situation.
Important regulations and tax implications for your exchange
4.95% (flat rate)
Yes
None
$0.50 per $500 of value (state), plus local taxes
Varies by county (2.05% average)
• Federal Form 8824 • Illinois Schedule NR (for non-residents) • Complete closing statements for both properties • Qualified Intermediary agreement
None
Informational step-by-step guide for your 1031 exchange
You must identify potential replacement properties within 45 days of selling your relinquished property. In Illinois, consider regional market differences, property tax variations, and local economic factors when identifying properties.
Work with a qualified intermediary to handle the exchange funds and documentation. Illinois has several experienced QIs who understand the local market and can help navigate the state's unique considerations.
Complete the purchase of your replacement property within 180 days of selling your relinquished property. Be aware of Illinois's real estate transfer tax, which will apply to the transaction.
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 the exchange.
Illinois has some of the highest property tax rates in the nation, averaging 2.05% statewide with significant variation by county and municipality. When selecting replacement properties, carefully research the local property tax rates and recent reassessment history, as these can significantly impact your investment returns.
Illinois real estate markets vary significantly between regions. The Chicago metro area offers urban and suburban options with strong rental demand, while downstate markets like Rockford, Peoria, and Champaign offer more affordable entry points with different economic drivers. Research regional economic trends, employment data, and population growth when selecting replacement properties.
In addition to the state transfer tax of $0.50 per $500 of value, many Illinois municipalities impose additional transfer taxes. For example, Chicago's rate is $5.25 per $500 of value, while other municipalities may have different rates. Factor these costs into your exchange calculations when selecting replacement properties.
Recent changes and upcoming regulations affecting 1031 exchanges
While there were no significant changes to Section 1031 of the Tax Code in 2024, 2025 may bring new proposals that could potentially affect 1031 Exchanges. Investors should stay informed about potential legislative changes.
Nearly 300 new laws became effective in Illinois, including several affecting real estate transactions and property management, though none specifically targeting 1031 exchanges.
In 2024, there were no significant changes to Section 1031 of the Tax Code affecting Illinois investors. The state continues to follow federal guidelines for 1031 exchanges.
Plan and track your critical exchange deadlines
Enter the closing date of your relinquished property to calculate your 1031 exchange deadlines:
Detailed analysis of key real estate markets in your area
Different regions within this state offer unique opportunities and challenges for 1031 exchanges. Here's an overview of key regional markets and their characteristics.
Chicago offers a diverse urban and suburban market with strong transportation infrastructure, cultural amenities, and economic diversity.
Rockford offers an affordable market with strong recent growth, manufacturing resurgence, and healthcare expansion.
Peoria/Bloomington offers a stable market with strong educational institutions, healthcare presence, and agricultural connections.
Springfield offers a government-centered market with stable employment, healthcare growth, and educational institutions.
Investment property insights for Illinois
Multi-family properties in Illinois offer stable returns with strong tenant demand, particularly in Chicago and its suburbs.
Retail properties in Illinois present mixed opportunities, with strong performance in certain submarkets and challenges in others.
Office properties in Illinois face challenges from remote work trends, though certain submarkets and property types show resilience.
Industrial properties in Illinois offer strong returns with robust demand, particularly in logistics corridors and near transportation hubs.
Local tax benefits and programs for property investors
Beyond the tax deferral benefits of a 1031 exchange, this state offers additional tax incentives that can further enhance your investment returns. Review these programs to see if your replacement property might qualify. Please contact a tax professional prior to electing any tax incentive to determine if there are any additional tax concerns or benefits available to you.
Tax incentives for businesses in designated Enterprise Zones, which can benefit commercial property owners through increased tenant demand and property values.
Property tax abatement, sales tax exemption, and income tax credits
Varies by zone, typically 5-10 years
Submit application to local zone administrator, receive certification, and meet ongoing reporting requirements
Tax incentives for redevelopment projects in designated riverfront areas, which can benefit property owners through increased property values and development opportunities.
Property tax abatement, income tax credits, and sales tax exemption
Varies by project, typically 5-7 years
Submit application to local zone administrator, receive certification, and meet ongoing reporting requirements
Tax incentives for large-scale business projects, which can benefit commercial property owners through increased tenant demand and property values.
Investment tax credits, utility tax exemptions, and sales tax exemptions
Up to 20 years
Submit application to Department of Commerce and Economic Opportunity, receive designation, and meet ongoing reporting requirements
Real 1031 exchange examples from Illinois
Current market conditions and future forecasts
Balanced with 5.4% increase in home values YoY.
Strong seller's market, named hottest housing market in December 2024.
Moderate growth with strong suburban demand.
Stable with moderate growth in university towns.
Long-term appreciation analysis in Illinois
Understanding historical property appreciation patterns can help you identify areas with strong long-term growth potential for your 1031 exchange replacement property.
5.4%
42.6%
89.3%
Moderate growth expected, particularly in areas with new development
6.8%
38.2%
72.5%
Strong continued growth expected, named hottest housing market in December 2024
7.2%
45.3%
94.7%
Steady growth expected, particularly in luxury properties
4.1%
29.6%
65.8%
Moderate growth expected, with stable demand
Current rental trends and opportunities in Illinois
Understanding the rental market is crucial when selecting investment properties for your 1031 exchange. This analysis provides insights into current rental conditions across the state.
| Property Type | Avg. Rent | Vacancy Rate | Rent Trend | Cap Rate |
|---|---|---|---|---|
| Luxury Apartments | $2,200 - $3,500 (1BR) | 6.2% | stable | 4.0% - 5.0% |
| Mid-Range Apartments | $1,400 - $2,000 (1BR) | 5.8% | up | 5.0% - 6.0% |
| Single Family Homes | $2,000 - $3,500 (3BR) | 4.5% | up | 4.5% - 5.5% |
Chicago's rental market includes a diverse mix of young professionals, students, and families. Approximately 45% of renters are under 35 years old. The market has a significant component of corporate relocations and international residents.
Chicago has implemented tenant-friendly regulations, including the Residential Landlord and Tenant Ordinance (RLTO) which imposes specific requirements on security deposits, disclosures, and maintenance. The city is considering additional tenant protections, including potential rent control measures, though these face constitutional challenges.
Chicago's rental market is expected to remain stable with moderate growth, particularly in neighborhoods experiencing revitalization and areas near transportation hubs. The combination of employment opportunities, cultural amenities, and transportation infrastructure supports rental demand.
| Property Type | Avg. Rent | Vacancy Rate | Rent Trend | Cap Rate |
|---|---|---|---|---|
| Luxury Apartments | $1,800 - $2,800 (1BR) | 5.5% | up | 4.5% - 5.5% |
| Mid-Range Apartments | $1,200 - $1,800 (1BR) | 4.8% | up | 5.5% - 6.5% |
| Single Family Homes | $2,200 - $4,000 (3BR) | 3.5% | up | 4.0% - 5.0% |
Suburban rental markets attract a mix of young professionals, families, and empty nesters. School district quality is a primary driver for family rentals. Corporate presence in suburban office corridors drives professional tenant demand.
Suburban municipalities generally follow state landlord-tenant law without the additional regulations found in Chicago. This creates a more landlord-friendly environment with fewer restrictions on security deposits, lease terms, and other aspects of property management.
Suburban rental markets are projected to see continued growth, particularly in communities with strong school districts and transportation access to Chicago. The trend toward remote work has increased demand for larger suburban rental units with home office space.
| Property Type | Avg. Rent | Vacancy Rate | Rent Trend | Cap Rate |
|---|---|---|---|---|
| Luxury Apartments | $1,200 - $1,800 (1BR) | 6.5% | stable | 6.0% - 7.0% |
| Mid-Range Apartments | $800 - $1,200 (1BR) | 5.2% | up | 7.0% - 8.0% |
| Single Family Homes | $1,200 - $2,200 (3BR) | 4.8% | up | 6.0% - 7.0% |
Secondary cities have diverse rental markets driven by local economic factors. Rockford's market is influenced by manufacturing and healthcare employment. Peoria's market is supported by Caterpillar and healthcare institutions. Springfield's market is stabilized by state government employment.
Secondary cities generally follow state landlord-tenant law with minimal additional local regulations. This creates a straightforward operating environment for landlords with predictable rules and procedures.
Secondary city rental markets show promising growth potential, particularly in Rockford which was recently named the hottest housing market in the nation. Affordability compared to Chicago and strong local economic drivers support rental demand in these markets.
Key mistakes to avoid in your 1031 exchange
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.
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.
In addition to the state transfer tax, many Illinois municipalities impose additional transfer taxes that can significantly increase transaction costs.
Research local transfer tax rates in the specific municipality where you're considering purchasing replacement property. For example, Chicago's combined 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.
Illinois real estate markets vary significantly between regions, with different economic drivers, growth patterns, and investment characteristics.
Conduct thorough research on the specific regional market where you're considering purchasing replacement property. Understand the local economic drivers, employment trends, and growth patterns. Consider consulting with a real estate professional who specializes in that specific market.
Chicago has specific landlord-tenant ordinances that impose additional requirements beyond state law, which can impact property management and returns.
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.
Common questions about Illinois 1031 exchanges
Yes, Illinois fully conforms to federal 1031 exchange rules. If the Section 1031 exchange is valid at the federal level, it is valid at the state level, and Illinois never gets to tax the gain deferred under federal law.
Illinois imposes a flat state income tax rate of 4.95% on all income, including capital gains, which can be deferred through a 1031 exchange.
No, Illinois does not impose withholding requirements on non-residents selling real property, making the process simpler for out-of-state investors engaging in 1031 exchanges.
Illinois has some of the highest property tax rates in the nation, averaging around 2.05% statewide, with significant variation by county and municipality. This is an important consideration when evaluating replacement properties for a 1031 exchange.