Taxes on Selling a House in Illinois: What You Need to Know

Selling a house in Illinois comes with tax implications that can affect how much money you keep from the sale. Homeowners may encounter federal, state, and local taxes, which vary depending on factors like profit from the sale and property location. Understanding these costs in advance can help avoid surprises at closing.

Several taxes may apply when selling a home, including capital gains tax and transfer taxes. Exemptions and deductions may reduce the tax burden.

Capital Gains Tax

Capital gains tax applies if a home has increased in value since it was purchased. The taxable gain is the difference between the sale price and the original purchase price, adjusted for qualifying expenses like home improvements and closing costs. The IRS classifies these gains as either short-term or long-term, depending on how long the home was owned.

If the home was owned for more than a year, the profit is taxed at long-term capital gains rates, which range from 0% to 20% at the federal level, depending on income. Short-term gains, from properties owned for a year or less, are taxed as ordinary income, often at a higher rate.

Illinois does not impose a separate state capital gains tax, but any profit from the sale is included in taxable income, affecting state income tax liability. Homeowners who made improvements should keep records of renovation costs, as these expenses can be added to the original purchase price to reduce taxable gains. For example, if a homeowner bought a house for $200,000 and sold it for $300,000 after spending $30,000 on renovations, the taxable gain would be $70,000 rather than $100,000.

Illinois Transfer Tax

Illinois imposes a transfer tax at the state, county, and sometimes municipal levels. The state charges $0.50 per $500 of the sale price, and counties add another $0.25 per $500, bringing the total state and county transfer tax to $0.75 per $500. This tax is typically the seller’s responsibility. For a $300,000 home sale, the combined state and county transfer tax would be $450.

Many cities impose additional transfer taxes. In Chicago, the total transfer tax is $5.25 per $500 of the sale price. Of this, $3.75 is paid by the buyer and $1.50 by the seller. A $300,000 home sale in Chicago results in a total transfer tax of $3,150, with the seller responsible for $900 and the buyer covering $2,250. Other municipalities, such as Evanston and Oak Park, also have local transfer taxes with varying rates and payment responsibilities. Sellers should check with their local government or a real estate attorney to confirm costs.

Some exemptions may reduce or eliminate transfer tax liability. Transfers between spouses or from a parent to a child may qualify, as well as sales related to foreclosure or bankruptcy. To claim an exemption, sellers must file an Illinois Real Estate Transfer Declaration (Form PTAX-203) with supporting documentation. Failure to do so could result in unnecessary tax payments or delays in closing.

Primary Residence Exclusion

Homeowners selling their primary residence may qualify for an exclusion that reduces or eliminates taxable profit. Under IRS rules, individuals can exclude up to $250,000 of gain, while married couples filing jointly can exclude up to $500,000. To qualify, the seller must have owned and lived in the home as their main residence for at least two of the last five years before the sale. These years do not need to be consecutive, allowing flexibility for those who may have rented out the property temporarily.

This exclusion is available once every two years. If a seller does not meet the full residency requirement due to circumstances like job relocation, divorce, or health issues, they may qualify for a partial exclusion. For example, if a single homeowner lived in the house for one year instead of two and had to sell due to a job transfer, they might be eligible to exclude $125,000 rather than the full $250,000.

Homeowners who used part of their residence for business purposes, such as a home office or rental unit, may have additional tax considerations. The primary residence exclusion still applies to the portion of the home used for personal living, but any depreciation claimed for business use must be recaptured and taxed as ordinary income upon sale. This is particularly relevant for those who claimed the home office deduction or rented out part of their home. Keeping records of depreciation amounts helps determine tax liability and avoid unexpected costs.

Local Tax Variations

Property taxes in Illinois vary by municipality, with local governments setting their own rates and assessment practices. Unlike transfer taxes, which are one-time costs, property taxes continue to accrue until ownership officially changes hands. Buyers often request prorated property tax credits at closing, especially in areas where taxes are paid in arrears. This means sellers may need to account for additional costs if property tax rates have increased since the last assessment.

Some municipalities impose special real estate taxes or fees that affect sellers differently. Certain townships levy special assessments for infrastructure projects, such as road repairs or sewer upgrades, which may come due upon selling the property. These assessments are tied to the property rather than the owner, meaning a seller could be responsible for a final lump-sum payment before transferring the title. Understanding these obligations in advance can prevent financial strain when negotiating a sale.

Required Filings and Forms

Selling a home in Illinois requires specific tax forms to ensure compliance with state and federal regulations. These documents verify transaction details, calculate applicable taxes, and claim exemptions where eligible. Failing to file the necessary paperwork can delay closing or result in unexpected tax liabilities.

The Illinois Real Estate Transfer Declaration (Form PTAX-203) is required for all property sales. This form provides details about the sale price, property type, and any exemptions claimed for transfer taxes. It must be submitted to the county recorder’s office at closing, along with payment for the transfer tax. If an exemption applies, sellers must attach supporting documentation. Sellers in Chicago must also file a separate Real Property Transfer Tax Declaration to comply with city tax requirements.

For federal tax reporting, sellers who realize a taxable gain exceeding the primary residence exclusion must report the sale on IRS Form 8949 and Schedule D of their tax return. If the transaction involves a significant gain, the closing agent may issue Form 1099-S, which reports the sale price to the IRS. Sellers who qualify for the exclusion but still receive this form should keep records proving eligibility in case of an audit. Proper documentation, including purchase records, improvement receipts, and closing statements, is essential for accurately determining taxable gains and avoiding unnecessary tax payments.