1031 Exchange & DST Investing in Illinois
Illinois taxes capital gains at a flat 4.95% and fully conforms to the federal 1031 exchange, so a properly structured swap defers both federal and state tax. Chicago's deep industrial, logistics, and multifamily markets make it a large source of exchange capital, and DST replacement interests are available nationwide.
State tax treatment of a 1031 exchange
Illinois conforms to IRC Section 1031, meaning a valid federal like-kind exchange of real property also defers Illinois income tax on the gain. Individual capital gains are taxed as ordinary income at the state's flat 4.95% rate, and there is no separate, preferential capital-gains bracket.
Illinois does not impose a nonresident real estate withholding tax on the seller at closing, and it has no clawback or continued-reporting regime that recaptures gain deferred on an out-of-state exchange. Deferred gain is simply carried in the replacement property's basis until a future taxable sale.
Market snapshot
The Chicago metropolitan area anchors Illinois real estate, with one of the nation's largest industrial and logistics footprints along the I-55 and I-80 corridors, extensive Class B and C multifamily, and significant medical office and net-lease retail. Secondary markets include the Metro East suburbs of St. Louis and downstate university towns such as Champaign-Urbana.
Statewide population has been roughly flat to slightly declining, but Chicago's port-rail-highway connectivity and diversified employment base continue to draw replacement capital, particularly investors trading out of management-intensive apartments and older commercial buildings.
Why 1031 & DST investors look here
- Full IRC 1031 conformity defers the flat 4.95% state tax alongside federal gain.
- Deep Chicago-area apartment and commercial base creates frequent, sizable relinquished-property gains.
- Investors tired of active Chicago landlording can move into passive, professionally managed DSTs.
Replacement-property options
Illinois exchangers are not limited to in-state replacement property; like-kind real estate is nationwide, so proceeds from a Chicago apartment building can be exchanged into a Delaware Statutory Trust (DST) holding institutional assets anywhere in the country. DSTs offer fractional, passive ownership across sectors such as industrial, multifamily, and net-lease; a later 721 UPREIT exchange can convert DST interests into operating-partnership units of a REIT for added diversification and estate-planning flexibility. Qualified Opportunity Zone funds are a separate deferral path for investors who prefer that structure.
Frequently asked questions
Does Illinois tax a 1031 exchange?
No. Illinois conforms to IRC Section 1031, so a properly completed like-kind exchange defers Illinois income tax on the gain just as it does federal tax. Tax is deferred until a future taxable sale of the replacement property.
Can I exchange Illinois property for out-of-state DSTs?
Yes. Like-kind real property can be located anywhere in the United States, so an Illinois relinquished property can be exchanged into a DST holding assets in other states without losing 1031 treatment.
Does Illinois withhold state tax when a nonresident sells real estate?
No. Illinois does not impose a nonresident real estate withholding at closing, though nonresident sellers still file an Illinois return to report the transaction.
Gerald F. “Jerry” Baker, III — Founder & Managing Principal, Baker 1031 Investments · FINRA Series 22 / 63 · SIE. Read full bio →
State tax treatment is general and changes frequently; this page is educational and is not tax, legal, or investment advice. Confirm current state and local rules with your own CPA and attorney. Securities offered through Aurora Securities, member FINRA/SIPC. Real estate investments involve risk, including possible loss of principal.