Illinois
Reviewed June 2026Federal §453 conformity
Yes. Illinois starts from the federal return, so installment gain is reported as payments arrive, at the flat 4.95% rate. The wrinkle is a second, smaller tax most sellers have never heard of: pass-through entities pay a 1.5% 'replacement tax' on their income — including installment gain the entity recognizes — on top of what the owners pay. If the entity stays alive to collect the note, the replacement tax rides along with every payment.
Nonresident sourcing
Gain from Illinois real estate or a business operating in Illinois is Illinois income for sellers anywhere, and the payments keep that character. Gain from intangibles such as stock generally follows the seller's home state.
Withholding
Illinois has no closing-table withholding for nonresident sellers of real estate. What it does have is pass-through withholding: the entity must withhold Illinois tax on nonresident owners' shares of Illinois income — including installment gain — unless a PTE election or composite arrangement covers it.
Selling, then moving (residency change)
Illinois-source gain stays taxable to Illinois after a move; gain that is not Illinois-source generally goes with the seller. Illinois has no New York-style rule accelerating deferred gain at the border, so for non-Illinois-source gain the planning is the familiar domicile work: change it genuinely, document it, and mind the year of sale.
Pass-through entity (PTE) tax election
Illinois has a PTE election at 4.95% with a friendlier calendar than the coastal states — the election is made on the entity's return for the year rather than by an early-spring deadline. One worry recently retired: Illinois removed the election's expiration date in late 2025, making the regime permanent — so, unlike several other states, the later payment years no longer depend on the legislature renewing it.
Estate and IRD
Illinois has its own estate tax with a $4 million threshold — well below the federal exemption and not shared between spouses automatically. An installment note counts at its value, and because of how Illinois computes the tax, crossing $4 million by a little can cost a lot. Sellers carrying a substantial note should see the Illinois estate projection before choosing the note's size and term.
Planning notes
The Illinois checklist is short but specific: price the 1.5% replacement tax into any plan that keeps the entity alive to collect the note, make the PTE election decision annually (the regime itself is now permanent), set up nonresident-owner withholding or composite filings where they apply, and run the estate projection against the $4 million threshold.
If the selling entity stays alive to collect installment payments, Illinois' 1.5% replacement tax applies to the gain the entity recognizes each year — on top of the owners' 4.95%. Price it into the keep-the-entity-alive decision before assuming the PTE election math works.
Educational information, current as of the June 2026 review. State law changes; confirm treatment with a qualified advisor before structuring a transaction.
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