Does Illinois recognize 1031 exchanges?
Yes. Illinois follows Section 1031 automatically, because the Illinois income tax starts from federal adjusted gross income and the state uses rolling conformity to the Internal Revenue Code. Gain the IRS lets you defer in a valid exchange never reaches your Illinois return.
That means there is no separate Illinois exchange form and no Illinois approval step. If the exchange meets the federal rules, the 4.95% Illinois tax is deferred with the federal tax. If it fails federally, it fails for Illinois too, and the whole gain is taxed by both.
The federal rules an Illinois exchange must meet
An Illinois exchange runs on the federal rules: real property held for investment or business use, traded for other like-kind real property, with a qualified intermediary holding the cash, a written identification within 45 days and a closing within 180 days. To defer all the gain, buy at least as much as you sold and reinvest all the net cash.
Our 1031 exchange rules page covers each requirement in detail, and the 1031 exchange guide is the hub for the rest of the topic, including reverse exchanges and DSTs. The points below are the ones that are specific to Illinois.
| Item | Federal rule | Illinois difference |
|---|---|---|
| Identification | 45 days from the sale | None |
| Closing on replacement | 180 days, or the return due date if earlier | None |
| Like-kind property | Any U.S. real property for U.S. real property | None; out-of-state replacements are fine |
| Withholding at closing | FIRPTA for foreign sellers only | No Illinois withholding |
| Clawback on later sale | Not applicable | None |
| Intermediary licensing | No federal license | No Illinois QI statute |
Illinois withholding at closing and how an exchange affects it
Illinois does not withhold state income tax at closing on a real estate sale, for residents or nonresidents. So unlike a New York or California exchange, there is no state form to file at the closing table to claim an exemption, and nothing is held back from the exchange proceeds.
The rule that matters comes later. A nonresident who exchanges out of an Illinois building and later sells the replacement in a taxable sale reports any gain from Illinois real property on Schedule NR. If the building is held in a partnership or S corporation with members who live outside Illinois, the entity may owe Illinois withholding on those members’ shares of any taxable gain, such as boot.
Does Illinois have a 1031 clawback?
No. Illinois has no clawback, so you can sell a Chicago building, buy replacement property in Indiana, Tennessee or Arizona, and Illinois will not track the deferred gain or tax it when you later sell the out-of-state property.
That puts Illinois in the simpler group of states. California, Massachusetts, Montana and Oregon do claw back deferred gain when property leaves the state in an exchange, and California requires a yearly filing to track it. An Illinois seller has no equivalent filing.
Qualified intermediary rules in Illinois
Illinois has no statute that licenses, bonds or regulates qualified intermediaries. The states that do have QI laws are California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia and Washington, and Illinois is not on that list.
Without a state law, protection comes from the intermediary you choose. Ask whether exchange funds sit in a separate account in your name or the exchange’s name, whether withdrawals need your signature, and how much fidelity bond and errors-and-omissions coverage the firm carries. Our page on choosing a 1031 qualified intermediary has a full checklist.
Illinois depreciation records in an exchange
Illinois does not follow federal bonus depreciation, so an owner who took bonus depreciation has Illinois adjustments on Form IL-4562 that must be settled when the property leaves their hands. The IL-4562 instructions treat a property that is sold or traded as being in its final year, when prior subtractions are reversed and prior bonus additions come back as a subtraction.
For most exchanges, those two moves leave total Illinois depreciation equal to federal by the end. If you ran a cost segregation study and took 100% bonus on short-life parts, bring every IL-4562 you filed to your CPA before the exchange year’s return. The replacement property starts a new set of federal and Illinois depreciation schedules, and any new bonus you take on it starts a new add-back.
How boot is taxed in an Illinois exchange
Boot is taxed by Illinois at the same 4.95% flat rate as any other gain, in the year of the sale. Boot is anything you receive that is not like-kind real property: cash you take out, cash the intermediary pays toward non-closing costs, or a drop in debt you don’t make up with new cash.
Because Illinois has one rate, the state share of boot is easy to figure: multiply the taxable boot by 4.95%. The federal share is harder, since boot can be taxed at up to 25% where it reflects past depreciation and at 15% or 20% on the rest, plus the 3.8% net investment income tax for many sellers. A common Illinois mistake is paying off a large mortgage on the old building and buying the replacement with a smaller loan, which creates debt-relief boot even though no cash changed hands.
Reporting an Illinois 1031 exchange
You report the exchange on federal Form 8824 with your federal return, and Illinois picks up the result through federal adjusted gross income on Form IL-1040. There is no Illinois exchange form.
Keep the closing statements, the 45-day identification letter, the exchange agreement and every IL-4562 for the old building in one file. If the replacement is outside Illinois and you are an Illinois resident, its rent and any later gain are still Illinois income while you live here. If you move away before selling the replacement, Illinois has no claim on the out-of-state property, because the deferred gain is not tracked.
Timing an exchange around Cook County reassessment
Cook County reassesses on a three-year cycle by region, and Illinois sales do not reset assessments, so the reassessment year shapes what a buyer will pay for your building. The City of Chicago was last reassessed in 2024 and the south and west suburbs in 2026.
If your building sits in a region that is due soon, buyers will underwrite a higher tax bill, and that can lower your price and the cash you carry into the exchange. Selling before a reassessment notice lands, or closing on a replacement right after its own reassessment, takes that uncertainty out of the numbers. Our property tax rate in Illinois page explains the multiplier and works through a $2 million example.
Common 1031 exchange paths out of Illinois
A common Illinois exchange is a forward delayed exchange out of a Chicago or Cook County apartment building into property in a lower-tax state. Property tax is a big part of the reason. Illinois averages 1.88% of value in the Tax Foundation’s 2026 figures, against 0.76% in Indiana, 0.52% in Tennessee and 0.48% in Arizona.
Other owners stay close to home and trade within the collar counties, for example from a Chicago courtyard building into a newer DuPage or Will County property with fewer units to manage. Owners who want to stop managing altogether often exchange into a Delaware Statutory Trust, which counts as like-kind real property. Our 1031 exchange DST guide covers that route.
As a rough illustration only, using those statewide averages for owner-occupied homes, $2,000,000 of property would carry about $37,600 a year in Illinois and about $15,200 in Indiana. A real apartment bill depends on the parcel and its local rates, but a gap of that size goes straight to NOI, and it is a big reason Cook County owners look across the state line.
- Chicago or suburban Cook multifamily into Indiana, Tennessee, Texas or the Sun Belt
- City of Chicago into the collar counties
- Several small buildings into one larger building
- Active ownership into a DST
Worked example: a 1031 exchange on a $2 million Illinois building
A married couple in Naperville sells a 20-unit building in Aurora for $2,000,000 in 2026. They bought it in 2014 for $1,100,000 and have taken $350,000 of depreciation. Selling costs are $100,000, so the gain is $1,150,000, and they owe $600,000 on the mortgage, leaving $1,300,000 of net cash with the intermediary.
In a taxable sale, they would owe about $291,200 of federal tax and $56,925 of Illinois tax, as our Illinois capital gains tax page works out. Instead, they identify a $2,400,000 building in Indianapolis within 45 days and close within 180, using all $1,300,000 plus a new $1,100,000 loan. They bought more than they sold and reinvested all the cash, so the full $348,125 is deferred.
Their basis in the new building is $1,250,000, which is the $2,400,000 price less the $1,150,000 deferred gain. If they had kept $100,000 in cash, that $100,000 would be taxable boot, and Illinois would take $4,950 of it on top of the federal tax.
| Line | Taxable sale | 1031 exchange |
|---|---|---|
| Sale price | $2,000,000 | $2,000,000 |
| Gain | $1,150,000 | $1,150,000 |
| Federal tax due in 2026 | $291,200 | $0 |
| Illinois tax due in 2026 (4.95%) | $56,925 | $0 |
| Cash to reinvest | $951,875 after tax | $1,300,000 |
| Basis in replacement | Not applicable | $1,250,000 |
Selling your Illinois building into an exchange with Skyline
Skyline buys apartment buildings with five or more units in Illinois, from Chicago and suburban Cook to Rockford and Peoria. We buy directly, close on your timeline, and can work inside 1031 deadlines. If you need extra time to find a replacement before your 45-day window starts, we can set the closing date around it and work with your intermediary on the assignment and closing documents.
Selling? Spread the tax with seller-carry terms
If a large tax bill is what is keeping you from selling, an installment sale may help. When you carry part of the price as a note, the gain is generally reported as you receive payments instead of all in the year of sale. Some parts of the gain, such as certain depreciation recapture, can still be due up front, so run the numbers with your CPA first.
Skyline Capital Investments buys apartment buildings with five or more units and can offer seller-carry terms, or a delayed closing that fits your 1031 timeline. Send the address and unit count and we typically respond within 48 hours. How seller financing works · How an installment sale is taxed · Seller financing calculator.
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