Thinking about selling a Highwood rental or buying your next investment property? A 1031 exchange may let you defer capital gains and keep more of your equity working for you. The rules are strict, and Lake County’s recording and transfer‑tax steps add moving parts. This guide walks you through the federal deadlines, Illinois requirements, local filings, and practical steps to execute a smooth exchange in Highwood. Let’s dive in.
1031 exchange basics in Highwood
A Section 1031 exchange lets you defer gain when you swap real property held for business or investment for other like‑kind real property. Like‑kind is broad for U.S. real estate, but it applies only to real property. Personal use homes do not qualify. See the IRS overview of like‑kind exchanges for the core rules and definitions you will rely on when planning your exchange. Review the IRS like‑kind exchange guide.
The nonnegotiable timeline: 45 and 180 days
Two clocks control every exchange. You have 45 days from the date you close on the relinquished property to identify your replacement, and 180 days to close on it. These windows run at the same time, and missing either deadline usually makes your gain taxable. Get the details on the 45 and 180 day rules and the identification methods before you list. See a clear timeline explainer.
Keep control of proceeds with a Qualified Intermediary
In a deferred exchange, you cannot receive or control the sale proceeds. A Qualified Intermediary (QI) holds the funds and coordinates the exchange documents. Your QI cannot be a related party or your agent. You will report the exchange on IRS Form 8824, which calculates your deferred and recognized gain. Use the IRS instructions for Form 8824 when you prepare your filing.
Step‑by‑step checklist for a Highwood 1031
- Decide early. If an exchange is likely, engage a reputable QI and a CPA before you sign a listing or purchase agreement. Align your timeline with the 45 and 180 day windows.
- Add contract language. Include assignment to the QI and notice that proceeds will be paid to the QI. Confirm your title company will accept the QI paperwork.
- Close the sale. Proceeds go directly to the QI. Your 45 day identification period and 180 day completion period start on this closing date.
- Identify in writing. Within 45 days, identify replacement property using the three‑property, 200 percent, or 95 percent rule. Deliver identification to your QI and keep proof.
- Close the replacement. Close within 180 days. Coordinate funds release with your QI and confirm recording at the Lake County Recorder for any Highwood property.
- Handle Illinois transfer filings. Determine if your transaction needs an Illinois PTAX‑203 or qualifies for an exchange exemption. Coordinate transfer‑tax stamps with title. Check PTAX‑203 instructions and exemptions.
- Record in Lake County. Highwood deeds record with the Lake County Recorder in Waukegan. Confirm fees, forms, and transfer‑stamp handling with your closer. See Lake County recorder information.
- Report taxes. File Form 8824 with your federal return for the year of the exchange. Your CPA will also address any Illinois reporting of taxable amounts.
Illinois and Lake County items to confirm
Illinois generally follows federal 1031 rules that apply only to real property. If you receive taxable amounts, such as cash boot or recognized gain, they are included in Illinois taxable income and taxed at state rates. Confirm current rates and your treatment with a CPA. See an overview of Illinois conformity and tax treatment.
At closing, Illinois requires a PTAX‑203 or a qualifying exemption notation. Some true exchanges may qualify for a transfer‑tax exemption, but any money difference that is taxable remains taxable. Local custom determines who pays transfer stamps, so confirm with your title company and negotiate in the contract. Review the state’s PTAX‑203 guidance.
A 1031 exchange does not change local property tax assessments. Replacement property in Highwood is assessed under Lake County rules, so review assessment timelines and estimated tax bills with your advisor and the local assessor.
Exchange structures and replacement options
Forward exchange
You sell first, your QI holds the funds, then you acquire your replacement within 180 days. This is the most common and usually the simplest path. See the IRS 1031 overview.
Reverse exchange
You buy the replacement first, and an Exchange Accommodation Titleholder temporarily holds title while you sell the relinquished property. Reverse exchanges are more complex and carry higher fees, but can be useful in competitive markets. Review the reverse exchange safe harbor.
Improvement exchange
You use exchange funds to improve the replacement property before you take title. These require strict structuring and tight timing with specialized providers.
DSTs and TICs as replacement property
You can acquire a fractional interest in institutional real estate through a Delaware Statutory Trust (DST) or a Tenant‑in‑Common (TIC) if the structure meets IRS guidance. These options can simplify closing within the 45 and 180 day windows, but they involve sponsor control and liquidity tradeoffs. Review offering documents, resale provisions, and tax opinions carefully. See the IRS ruling that addresses DST treatment.
Avoid these costly pitfalls
- Missing the 45 or 180 day deadlines. Mark your calendar and build buffer time into your plan.
- Taking constructive receipt of proceeds. All funds must flow to and from the QI under the exchange documents.
- Creating avoidable boot. Replace equal or greater value and match or increase debt to avoid taxable differences.
- Choosing the wrong QI. Work with a reputable, well‑capitalized intermediary with proper controls and references. If a QI fails, IRS guidance outlines reporting, but prevention is better. Read the IRS bulletin on QI default reporting.
- Skipping Illinois filings. Confirm PTAX‑203 requirements, transfer‑stamp handling, and Lake County recording procedures early so closing is not delayed.
When a 1031 fits Highwood goals
If you are selling a Highwood rental and moving into a larger multi‑unit, a forward exchange can keep your capital working while you scale. If you find the perfect replacement before listing, a reverse exchange can lock it in while you sell. If you need income and less hands‑on management, a DST interest may be a fit if it meets IRS rules and your time horizon.
Ready to move forward on the North Shore with a clear plan and tight execution? Partner with a team that understands the deadlines, the local filings, and the strategy behind every exchange. Connect with LWG Real Estate to map your Highwood 1031 from contract to closing.
FAQs
Can you use a 1031 on your primary home in Illinois?
- No. 1031 applies only to property held for investment or business. A former rental converted to a primary home has special rules, so review the IRS guidance before you plan. See Publication 523.
How are Illinois transfer taxes handled in a 1031 exchange?
- Illinois requires PTAX‑203 or an exemption notation. A true exchange may qualify for an exemption, but any taxable money difference is still taxable. Confirm who pays transfer stamps with your title company. Review PTAX‑203 instructions.
Do Lake County property taxes change because of a 1031?
- No. A 1031 defers federal gain, but it does not change how the Lake County Assessor values property. Plan for standard assessments and tax bills on your replacement property.
How do you report a Highwood 1031 to the IRS?
- File IRS Form 8824 for the year of the exchange. The form calculates deferred and recognized gain and sets basis in your replacement property. Use the IRS instructions.
Can you buy a DST or TIC with exchange funds from a Highwood sale?
- Yes, if the structure meets IRS rules and offering terms. Review sponsor controls, capital expenditure limits, fees, and exit plans. See the IRS DST ruling.
What if my Qualified Intermediary fails during the exchange?
- The IRS has guidance on reporting when a QI defaults, but it does not fix missed deadlines or funds at risk. Choose a strong QI with proper safeguards. Read the IRS bulletin.
