1031 exchange in
Illinois.

Does Illinois follow federal 1031 rules?

Illinois conforms to federal Section 1031 for real property and has no clawback. There is no non-resident real estate withholding. The dominant Illinois-specific 1031 underwriting issue is Cook County property tax — the triennial reassessment cycle, late billing, and chronic over-assessment of commercial property create cap-rate uncertainty that affects every Chicago-area exchange.

Illinois capital gains tax structure

Illinois has a flat 4.95% state income tax rate (2026), applied to capital gains as ordinary income with no long-term preferential rate. There is also a 1.5% personal property replacement tax on partnerships and S-corps that flows through to certain pass-through structures.

Illinois has had a flat 4.95% individual income tax rate since 2017, applied to capital gains as ordinary income with no long-term preferential treatment. A 1.5% personal property replacement tax (PPRT) applies to partnerships and S-corps doing business in Illinois, which can affect 1031 buyers holding through pass-through entities — it is in addition to, not instead of, the 4.95% individual rate. Estimated tax payments are due quarterly when expected liability exceeds $500. Illinois has not adopted the millionaire surcharge that Massachusetts and others have layered on, but the state pension funding crisis (one of the worst-funded systems in the country) creates ongoing political pressure on rate stability that an out-of-state 1031 buyer should monitor over a multi-year hold.

Federal tax treatment of a successful 1031 is deferral of capital gain and unrecaptured Section 1250 depreciation recapture (federally taxed at a maximum 25% when eventually recognized). Illinois's state treatment sits on top of those federal rates.

Common 1031 replacement strategies in Illinois

Chicago is the largest CRE market in the Midwest by volume and supports every product type. Class A urban multifamily (Lincoln Park, West Loop, Gold Coast, Fulton Market) trades 4.75–5.75% caps on stabilized product; Class B intown holds 5.5–6.5%. Suburban industrial along I-55, I-80, and I-294 is the most active 1031 product type — Joliet/Will County logistics is one of the largest distribution submarkets in the country, with credit-tenant warehouse trading 5.5–6.5% for stabilized big-box. Naperville and the I-88 corridor (formerly office-heavy) has shifted toward suburban multifamily and medical-office post-2020. Rockford is a manufacturing/industrial market with smaller-bay product. The Chicago Mansion Tax (the city's progressive Real Estate Transfer Tax that the 2024 Bring Chicago Home referendum failed to expand) applies to commercial transactions structured as residential — relevant for mixed-use deals. Cook County property tax uncertainty pushes a meaningful share of in-state sellers into out-of-state replacement.

Top Illinois CRE markets for 1031 buyers

Chicago

The deepest CRE market in the Midwest. Class A urban multifamily (Fulton Market, Lincoln Park, West Loop) trades 4.75–5.75% caps; Class B intown 5.5–6.5%. Suburban Class B garden-style holds 6.0–7.0%. The dominant underwriting issue is Cook County property tax — triennial reassessments swing 15-30%, late billing creates cash-flow uncertainty, and the appeal process is its own profession. Chicago Real Estate Transfer Tax stacks 0.75% (city) + 0.10% (state) + 0.05% (county) for a combined 0.90% on commercial transfers. Underwrite Cook County property tax conservatively or you will be wrong.

Naperville

Naperville is the largest western suburb and a former office-heavy market that has shifted toward multifamily, medical-office, and last-mile logistics post-2020. Class B suburban multifamily trades 5.75–6.75%; medical-office adjacent to Edward Hospital and Northwestern Medicine holds 6.0–7.0%. DuPage County property tax is high (above 2% effective rate on commercial) but more predictable than Cook — fewer late-billing surprises and a narrower assessment-uncertainty band.

Aurora

Aurora is a value-tier suburban market with a mix of industrial (small-bay flex along I-88), older Class B multifamily, and retail. Multifamily trades 6.25–7.25%; industrial 6.5–7.5%. Kane County property tax is materially lower than DuPage or Cook on commercial — a quiet underwriting advantage for a 1031 buyer who can find product that fits. Broker depth is thinner than Naperville, exit timelines run longer.

Rockford

Rockford is a manufacturing and industrial market — Chrysler Stellantis assembly, aerospace suppliers, and a growing medical sector anchored by Mercyhealth and OSF St. Anthony. Industrial and small-bay flex trades 7.0–8.0%; Class B multifamily 7.5–8.5%. The market is genuinely tertiary by Chicago standards — broker depth is thin, and a 1031 buyer should expect longer marketing and closing timelines than the Chicago metro. The yield premium is real, but the liquidity discount is too.

Local counsel, recording, and filing in Illinois

Illinois is not an attorney-state for closings statutorily, but in Cook County and the collar counties, attorney-driven closings are the strong norm — title companies coordinate but the closing itself is run by attorneys. For any Chicago 1031, retain a Chicago real estate attorney experienced with Cook County recording, transfer-tax mechanics, and (critically) property tax appeal — the appeal practice is its own ecosystem with specialist firms (Worsek & Vihon, O'Keefe Lyons & Hynes, etc.). Property tax appeal counsel is often a separate engagement from your transactional attorney; budget for both. Recording is at the county Recorder of Deeds office.

Recent developments in Illinois

Cook County's 2024 reassessment covered the City of Chicago townships (the city is on the 2024 / 2027 / 2030 cycle), and 2025 covered the North Tri (north of North Avenue, outside city). The 2026 reassessment covers the South Tri (south and west suburbs). Commercial owners in 2025 reassessment areas are seeing assessment increases of 15-30%, with the appeal cycle running through 2026. Cook County is also infamous for late billing — 2024 second-installment bills were delayed by months, and the cash-flow timing affects underwriting. The 2024 Bring Chicago Home referendum (which would have created a tiered Real Estate Transfer Tax topping out at 3% on transactions above $1.5M) failed at the ballot box, but progressive transfer-tax proposals continue to be discussed in city council. For 1031 buyers, the tax-policy uncertainty is real and recurring.

Common mistakes in Illinois 1031 exchanges

• Underwriting Chicago multifamily off the seller's current property tax bill. Cook County reassesses every three years on a triennial cycle (Chicago in 2024/2027/2030; northern suburbs 2025/2028/2031; southern suburbs 2026/2029/2032). Assessment swings of 15-30% per cycle are routine on commercial property. If your 1031 underwriting uses the current tax bill as a static input and your acquisition is a year before reassessment, your post-reassessment tax bill could destroy your underwritten cap rate. Run a property-tax sensitivity scenario at +25% before closing and engage Cook County appeal counsel pre-close on any deal above $5M.
• Missing the personal property replacement tax (PPRT) on pass-throughs. Illinois imposes a 1.5% personal property replacement tax (PPRT) on partnerships and S-corps doing business in Illinois — in addition to the 4.95% individual income tax that flows through to partners. If you're holding Illinois 1031 replacement through a partnership or S-corp, the entity-level PPRT is a real cost that out-of-state CPAs sometimes miss. C-corps face a 2.5% PPRT, on top of the 7% corporate income tax, for a combined 9.5% — relevant if your 1031 vehicle is a C-corp (rare but not zero).
• Treating Cook County late billing as a one-time anomaly. Cook County has issued late property tax bills in multiple recent years — second-installment bills delayed by months past the historical August deadline. For a 1031 buyer, this affects cash-flow timing on the replacement: NOI distributions get held back to fund tax escrow against bills that haven't arrived yet, and lender debt-service reserves can run higher than peer-county comps. It's not a one-time aberration; it's a recurring feature of Cook County administration. Build it into your operating model.

What to do if you're starting a Illinois-source 1031

1. Engage a Qualified Intermediary before the downleg closes. Your QI cannot be a disqualified person (attorney, CPA, or real estate agent who has represented you in the last two years).
2. Confirm state conformance and any clawback or withholding filings with a Illinois-licensed CPA.
3. Identify replacement property within 45 days in writing, delivered to your QI, under the Three-Property Rule or one of the alternative identification rules.
4. Close on replacement within 180 days of the downleg closing or by your federal tax-return due date (with extensions), whichever is earlier.
5. File Form 8824 with your federal return reporting the exchange. File any required Illinois state forms for the year, including any clawback or withholding-exemption filings.

FAQ: 1031 exchanges in Illinois

How should I think about Cook County property tax in my 1031 underwriting?

Three things matter. First, the triennial reassessment cycle — Chicago 2024/2027/2030, North Tri 2025/2028/2031, South Tri 2026/2029/2032 — and your acquisition timing relative to the next reassessment in your township. Second, run a property-tax sensitivity scenario at +25% to your current tax bill, because assessment swings of 15-30% per cycle are routine on commercial property. Third, engage Cook County property tax appeal counsel (Worsek & Vihon, O'Keefe, Sarnoff, Liston & Tsao, etc.) pre-close on any deal above $5M — appeal work is a specialty practice separate from your transactional attorney, and the savings can pay back the engagement multiple times over.

Does Illinois have non-resident real estate withholding?

No. Illinois does not require buyer-side withholding on sales by non-residents. Out-of-state sellers report the Illinois-source gain on Form IL-1040 NR (non-resident return) and pay any liability with the return. This is a meaningful procedural advantage versus neighboring Indiana, Wisconsin, and Iowa (none of which have material non-resident withholding either) compared to Eastern states with active withholding regimes.

What's the personal property replacement tax (PPRT) and does it affect my 1031?

PPRT is a 1.5% Illinois entity-level tax on partnerships and S-corps doing business in Illinois (2.5% on C-corps). It is in addition to, not instead of, the 4.95% individual income tax that flows through to partners. If you hold Illinois 1031 replacement through a partnership, S-corp, or LLC taxed as a partnership, the entity files Form IL-1065 or IL-1120-ST and remits PPRT on Illinois-source income. Out-of-state CPAs unfamiliar with Illinois pass-through mechanics frequently miss this — confirm with Illinois CPA before closing.

Did the 2024 Bring Chicago Home referendum change Chicago transfer tax?

No. The 2024 Bring Chicago Home referendum, which would have restructured Chicago's Real Estate Transfer Tax into a tiered progressive structure topping out at 3% on transactions above $1.5M, failed at the ballot. The current Chicago RETT remains 0.75% (city) + 0.10% (state) + 0.05% (county) for a combined 0.90% on most commercial transfers. Progressive transfer-tax proposals continue to be discussed in Chicago city council, however, and a 1031 buyer with a multi-year hold should monitor the political conversation.

Why does Cook County issue tax bills late, and how does it affect my deal?

Cook County's property tax administration involves the Assessor, Board of Review, Department of Revenue, and Treasurer — and recent years have seen multiple second-installment bills delayed by months past the historical August deadline due to system upgrades, appeals processing, and political friction between offices. For a 1031 buyer, the impact is on cash-flow timing: NOI distributions get held back to fund tax escrow against bills that haven't arrived, lender debt-service reserves run higher than comparable suburban counties, and seasonal cash flow is harder to predict. It's a recurring feature, not an anomaly — build it into your operating model and lender conversations.

Should the Illinois pension crisis affect my 1031 hold-period decision?

Possibly, at the margin. Illinois has one of the worst-funded state pension systems in the country, and the structural funding gap creates ongoing political pressure on income-tax rate stability and corporate tax policy over the next 5-10 years. The flat 4.95% rate has held since 2017, but constitutional and legislative proposals to introduce graduated brackets recur. For a 5-7 year 1031 hold the rate is reasonably stable; for a 15-20 year hold, model a sensitivity scenario at higher rates. Cook County property tax uncertainty is the more immediate underwriting issue than state income tax instability.