Capital gains tax in Illinois (2026): selling a business, real estate or farm
The Illinois layer that most calculators miss: replacement tax on the entity
Illinois has two income taxes that can touch a business sale. The individual income tax is a flat 4.95% (35 ILCS 5/201(b)(5.4), IDOR rate table, 2026). Separately, the personal property replacement income tax is imposed on the entity: 1.5% of net income for partnerships, trusts and S corporations, and 2.5% for C corporations, which also pay the 7% corporate income tax (35 ILCS 5/201(c) and (d)). The replacement tax took the place of the old personal property tax on businesses, and it applies to the entity's Illinois net income, including gain on assets it sells.
That means an S corporation or LLC taxed as a partnership that sells its assets pays roughly 1.5% of the Illinois-apportioned gain before the owners see their share, and the owners then pay 4.95% personally. A sale of the shares or membership interests instead puts the gain on the owners' returns only.
Worked example: a $2.5 million S corporation asset sale
In the first example the owners' personal Illinois tax on the sale is $123,750, alongside federal income tax of $546,847 and net investment income tax of $95,000, for a total of $765,597 (2026). Illinois taxes the $300,000 of recapture and the goodwill gain alike at 4.95%. Add the entity's replacement tax: 1.5% of $2.5 million is about $37,500 if all of the gain is Illinois net income, which the engine above does not include.
Federal rates for comparison: long-term gain is taxed at 0%, 15% or 20%, with 20% above $613,700 of joint taxable income in 2026 (Rev. Proc. 2025-32), and the 3.8% net investment income tax under IRC 1411 can apply to a passive owner's share; see the capital gains hub and net investment income tax on a sale. Structure choices are covered in asset sale vs stock sale and pass-through entity tax on a sale.
Retirees: Illinois exempts pensions, not gains
Illinois is known as retiree-friendly because it subtracts distributions from 401(k)s, IRAs, pensions and government retirement plans from base income (35 ILCS 5/203(a)(2)(F), 2026). That subtraction does not extend to capital gains. A retired couple living on tax-exempt pension income who sells a rental, a farm or a block of stock pays the full 4.95% on the gain.
One rare Illinois subtraction is worth checking for very old holdings: the "valuation limitation amount" removes appreciation that accrued before August 1, 1969, when the Illinois income tax began, for property owned before that date (35 ILCS 5/203(f)). It mostly matters for farmland or buildings held by the same owner since the 1960s and not inherited since. Farmland specifics: capital gains tax on farmland.
Leaving Illinois: what follows you and what does not
Illinois allocates capital gains by asset type. Gain on Illinois real property is Illinois income wherever the seller lives; gain on tangible property follows its situs; gain on intangibles such as stock follows the owner's domicile at the time of sale (35 ILCS 5/303(b), 2026). In the second example a couple who retired to Arizona sells an Illinois apartment building and still owes Illinois $64,350 on the gain, within a total of $398,103.
For stock, units and other intangibles, a completed move before the sale removes Illinois from the picture. For property, it does not. Plan the order of events with changing residency before a sale, and see our rental property page for depreciation and recapture on buildings.
Installment sales and Illinois-source notes
Illinois begins with federal adjusted gross income (35 ILCS 5/203), so a Section 453 installment sale spreads the Illinois gain the same way as the federal gain, at 4.95% in each year it is recognized. With a flat rate, spreading does not lower the Illinois rate; the benefit is federal bracket management and deferral. Because Illinois real property gain is allocated to Illinois, installment gain on an Illinois building stays Illinois income even if you move before the payments arrive.
Protect the note: a first mortgage on the property, a solid down payment, interest at or above the applicable federal rate, and acceleration on default or resale. See seller financing.
Bonus depreciation, transfer taxes and the Illinois estate tax
Illinois requires an addition for federal bonus depreciation (35 ILCS 5/203, subparagraph D-15, which from 2026 also covers 168(n) qualified production property), allows subtractions in later years, and makes a further adjustment when the property is sold (D-16). The upshot is that Illinois depreciation history can differ from federal; have your CPA reconcile it in the year of sale rather than copying the federal gain.
The state real estate transfer tax is 50 cents per $500 of value, and it reaches transfers of a controlling interest in a real estate entity, not only deeds (35 ILCS 200/31-10, 2026); Cook County and some municipalities, including Chicago, add their own transfer taxes. Finally, Illinois has its own estate tax with a $4,000,000 exclusion amount that is not indexed (35 ILCS 405/2), so an older owner weighing a hold for the step-up at death should model both taxes. To see the paths side by side, get the Big Sale Tax Analysis.
What to know
The flat 4.95% makes Illinois simple for individuals, but business owners should budget for the entity's replacement tax on an asset sale, and retirees should not assume their pension exemption covers gains. Leaving the state helps only with intangibles; Illinois real estate gain, including installment payments on it, stays taxable. The $4 million estate tax threshold is low enough to affect many sellers who choose to hold.
Worked example
Married couple in Naperville, $250,000 of other income, whose S corporation sells its assets: $2.2 million long-term gain on goodwill plus $300,000 of equipment recapture, all Illinois-apportioned, cash at closing in 2026. Personal Illinois tax only; the entity's 1.5% replacement tax is discussed below. Married couple who moved to Arizona, $150,000 of other income, sell an Illinois apartment building: $1 million long-term gain plus $300,000 of unrecaptured Section 1250 gain, cash in 2026.
| Engine run | S corporation asset sale, Illinois owners | Retired to Arizona, sells a Chicago-area building |
|---|---|---|
| Filing status | Married, joint | Married, joint |
| State | Illinois | Illinois |
| Other income (wages, pension, interest) | $250,000 | $150,000 |
| Long-term capital gain | $2,200,000 | $1,000,000 |
| Unrecaptured Section 1250 gain (25% max) | $0 | $300,000 |
| Section 1245 recapture (ordinary income) | $300,000 | $0 |
| Federal income tax on the sale | $546,847 | $288,153 |
| Net investment income tax (3.8%) | $95,000 | $45,600 |
| State income tax on the sale | $123,750 | $64,350 |
| Total tax caused by the sale | $765,597 | $398,103 |
| Effective rate on the gain | 30.6% | 30.6% |
| Gain kept after these taxes | $1,734,403 | $901,898 |
Computed October 7, 2026 by the Big Sale Tax engine (engine.js yearTax): federal brackets, 0/15/20% thresholds and AMT from Rev. Proc. 2025-32 (OBBBA-adjusted) and the One Big Beautiful Bill Act (P.L. 119-21); NIIT under IRC 1411 (thresholds not indexed); state tax from the engine's state table. "Tax caused by the sale" = tax with the sale minus tax without it. Excludes selling costs, local taxes and estimated-tax timing. Education only.
Run your own numbers
2026 law from the engine: federal 0/15/20% brackets (Rev. Proc. 2025-32), 25% cap on unrecaptured 1250 gain, ordinary rates on 1245 recapture, 3.8% NIIT over $200,000 single / $250,000 joint (IRC 1411), AMT, and your state's rules. Tax shown is the tax caused by the sale. Excludes selling costs, local taxes and NIIT exceptions for active business owners. Education only.
Long-Term vs Short-Term Capital Gains (2026)
The one-year holding rule, the 2026 0/15/20% thresholds for every filing status, NIIT, recapture, the state layer and a worked $200,000 example: 11 months vs 13 months, and what spreading the gain can save.
Frequently asked questions
Does Illinois tax capital gains differently than income?
Is it true Illinois doesn't tax retirement income but does tax my brokerage gains?
Does Illinois tax capital gains on the sale of a primary residence?
What is the Illinois capital gains tax on stocks?
How can I reduce capital gains tax in Illinois?
Do I owe Illinois tax if I sell Illinois property after moving away?
Sources
- IDOR: income tax rates
- 35 ILCS 5/201 (tax imposed, replacement tax)
- 35 ILCS 5/203 (base income)
- 35 ILCS 5/303 (allocation of nonbusiness income)
- 35 ILCS 200/31-10 (real estate transfer tax)
- 35 ILCS 405/2 (Illinois estate tax)
- Rev. Proc. 2025-32
Figures as of October 7, 2026; each rate and limit above names its source and year. Education only, not legal or tax advice.
Keep reading
Indiana
Flat 2.95% state tax plus a county rate fixed by where you live on January 1, and depreciation add-backs that shrink the Indiana gain.
ReadWisconsin
Only 70% of a long-term gain is taxed, and only 40% of a farm gain, but recapture gets no break and the top rate is 7.65%.
ReadFlorida
Florida taxes no individual's capital gain, but a big sale still meets documentary stamps, the corporate income tax for C corporations, and homestead reass
ReadPass-through entity tax
In a sale year the SALT cap shrinks to $10,000, so an entity-level state tax election can be worth six figures. Which deals qualify, and the state deadlines.
ReadAsset sale vs stock sale
Buyers want assets for the step-up, sellers want stock for one layer of capital gain; here is how the difference is measured and priced.
ReadMoving states before a sale
Becoming a resident of a no-income-tax state before you sell can remove state tax on some gains, but only for the right asset, with the right timing and a real
ReadKnow your number before you sign.
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