How to Do a 1031 Exchange in Illinois: A Step-by-Step Guide

One question we’re asked almost every week is:
"How do I do a 1031 exchange of real estate in Illinois?"

A 1031 Exchange (named after Section 1031 of the Internal Revenue Code) allows a seller of real estate to defer paying capital gains tax by reinvesting the proceeds into new real estate. As long as the transaction follows IRS guidelines, it’s treated as an exchange, not a sale and purchase. This means taxes like capital gains, depreciation recapture, and net investment income tax can be legally deferred.

At Macon County Title, we guide clients – and even other attorneys and tax professionals – through 1031 exchanges from start to finish, preparing all required paperwork to make the process smooth and compliant.

1031 Exchange in 7 Simple Steps

(Note: This guide explains a standard or “forward” exchange. A reverse exchange, where you buy before you sell, is also possible, but involves a different structure.)

1. Consult Your Tax Advisor

Before moving forward, the exchanger (the seller) should speak with a qualified tax advisor to understand the potential tax liability. This will help determine if a 1031 exchange is appropriate.

2. Set Up the Exchange

We’ll work with you to structure the exchange properly, coordinating with your title company, handling contracts, and preparing the exchange documents. A Qualified Intermediary (QI) is usually involved to hold the proceeds securely.

3. Close on the Relinquished Property

Before or at the time of closing, we’ll help you sign the necessary exchange documents. The sale proceeds will be placed in a dedicated exchange escrow account.

⚠️ Important: Do not close on the sale before setting up your exchange. If funds go directly to you, it could disqualify the transaction.

4. Identify Replacement Property

Within 45 days of selling your property, you must submit a written identification of the replacement property (or properties). We provide the forms and guide you through this process.

5. Close on the Replacement Property

You have 180 days from the sale of the relinquished property (or until your tax return is due, whichever is earlier) to complete the purchase of the new property. We coordinate the documentation and transfer of exchange funds to the closing agent.

6. File Your Tax Return

Once both closings are complete, your accountant will file your return and report the exchange.

🎉 Congratulations! You’ve successfully completed a 1031 exchange and deferred your capital gains taxes.

Work With Local Experts

At Macon County Title, we’ve helped dozens of clients across Illinois complete 1031 exchanges confidently and compliantly. Whether you're a property owner, investor, attorney, or advisor – we’re here to help.