Capital Gains Tax on a Home Sale: What Illinois Sellers Owe

Do you pay capital gains tax when you sell your home in Illinois?

Usually not on your main home. If you owned it and lived in it for at least 24 months of the five years before closing, IRS Publication 523 lets you exclude up to $250,000 of gain, or $500,000 for most married couples filing jointly. Gain above that is taxable federally, and Illinois taxes it too at its flat 4.95% income tax rate, since the state return starts from your federal adjusted gross income.

By Kealan O’Neil | October 21, 2026

If you’ve owned and lived in your home for a few years, capital gains tax may never come up. The surprises tend to come from guessing at the rules instead of checking them before you list.

The question shows up on Illinois forums all the time. In one r/RealEstate thread titled “IL capital gains on home sale before two years?”, the replies boiled it down to “you have to have lived in the home for 2 of the past 5 years” and “You need to consult with a tax pro.” Both are right, and there’s more you can do about capital gains tax before you pick a closing date.

Here’s how the exclusion works, what Illinois adds, and the six things to line up before you sell. The examples use Montgomery, which sits in both Kane and Kendall Counties.

How the capital gains tax exclusion works on a home sale

The federal rule is Section 121 of the tax code, and the IRS explains it in Publication 523, Selling Your Home. To get the full exclusion, you have to pass three tests.

The ownership, residence, and look-back tests

First, you owned the home for at least 24 months of the five years ending on the date of sale, which Publication 523 defines as the date of closing. For a married couple filing jointly, only one spouse has to meet this part.

Second, you lived in it as your main home for at least 24 months, or 730 days, of those same five years. The time doesn’t have to be one block, but each spouse has to meet the residence test on their own to get the full $500,000.

Third, you didn’t take the exclusion on another home sale in the two years before this one. If you pass all three, the first $250,000 of gain, or $500,000 for a qualifying joint return, isn’t taxed. Miss one, and capital gains tax may apply to some or all of your gain.

Your gain is not your sale price

Sellers often overestimate their capital gains tax because they compare the sale price to what they paid years ago. Your gain is smaller than that gap.

Start with the “amount realized,” which is the sale price minus selling expenses like commissions, advertising, legal fees, and the transfer stamps you pay as the seller. Our guide to what Illinois sellers pay at closing lists the usual items.

Then subtract your adjusted basis. That’s what you paid, plus certain purchase costs like owner’s title insurance, recording fees, survey fees, and legal fees, plus improvements that add value or extend the home’s life, like an addition, a new roof, or a kitchen modernization. Publication 523 says loan costs such as points, appraisal fees, and mortgage insurance don’t count, and ordinary repairs don’t add to basis.

Here’s an illustration, not a real sale. A single Montgomery owner paid $220,000 in 2014, had $3,000 of qualifying purchase costs, and spent $40,000 on improvements, for a basis of $263,000.

They sell for $520,000 and pay $30,000 in selling expenses, so the amount realized is $490,000 and the gain is $227,000. That’s under $250,000, so no capital gains tax is due if they pass the tests.

What Illinois adds to your capital gains tax bill

Illinois doesn’t have a separate tax on gains. It treats them as regular income.

The Illinois Department of Revenue’s IL-1040 instructions say Line 1 starts with the adjusted gross income from your federal return, and the Illinois income tax rate is 4.95%. Gain you exclude federally never reaches your federal adjusted gross income, so Illinois doesn’t tax it either.

Gain above the exclusion is where Illinois sellers feel capital gains tax. It shows up federally and then again on your Illinois return at 4.95%.

Federal rates on the taxable part

If you owned the home more than one year, the taxable part is a long-term gain. Under IRS Revenue Procedure 2025-32, the 0% rate for 2026 applies up to $49,450 of taxable income for single filers and $98,900 for joint filers, and the 20% rate starts above $545,500 single and $613,700 joint. Gain that falls between those points is taxed at 15%.

If you sell within a year of buying, IRS Topic 409 says the gain is short-term and taxed at ordinary income rates. Higher earners can also owe the 3.8% net investment income tax, which IRS Topic 559 applies above $200,000 of modified adjusted gross income for single filers and $250,000 for joint filers. That tax doesn’t apply to the part of a home sale gain you exclude.

When you sell before 24 months

You might still get a reduced exclusion and owe little or no capital gains tax. Publication 523 allows one when the main reason for selling was a work move, a health issue, or an unforeseeable event.

The work test is specific. Your new job has to be at least 50 miles farther from the home than your old one. The IRS example is an old job 15 miles away and a new one 65 miles away.

Unforeseeable events include divorce or legal separation, a death, becoming eligible for unemployment compensation, and the home being destroyed or condemned. The math divides your qualifying months by 24 and multiplies by $250,000. If you’re a single filer who lived in your Montgomery home 12 months before a qualifying job move, you can exclude up to $125,000 of gain.

Homes you rented out or inherited

Former rentals are where capital gains tax gets tricky. If you moved out and rented the home, your rental years don’t wipe out the exclusion as long as you still pass the 24-month tests within the five years. Rental time before you moved in is different, since Publication 523 treats most of it after 2008 as nonqualified use that can’t be excluded.

You can’t exclude the gain equal to depreciation you took or could have taken after May 6, 1997, though. Our post on the costs of owning an investment property covers that trap from the buyer’s side.

Inherited homes follow different basis rules, usually starting from the value on the date of death. We walk through that in selling an inherited house in Illinois.

What the best real estate agents in Montgomery, IL do before you pick a closing date

Your agent isn’t your tax preparer, and you shouldn’t treat them like one. The right agent does make sure the capital gains tax questions get asked while you still have choices.

1. Count your months first. Find your closing date from the purchase and your move-in date, then count to 24 months of ownership and residence before you set a list date.
2. Pull your purchase file. Find your old settlement statement, deed, and owner’s title policy, since those show the price and purchase costs that build your basis.
3. Rebuild your improvement records. Gather contracts, receipts, and permits for additions, roofs, kitchens, decks, and other upgrades that add to basis.
4. Estimate gain on a net sheet. Subtract selling expenses and basis from a realistic price so you know whether you’re near the $250,000 or $500,000 limit.
5. Talk to a CPA before you sign. Bring the net sheet to a tax professional if you’re over the limit, short of 24 months, or selling a former rental.
6. Answer the 1099-S question at closing. Ask your closing agent whether you qualify to sign the principal residence certification or will receive Form 1099-S.

In Montgomery, step two can take more digging because the village spans two counties. Your deed is recorded with the Kendall County Recorder at 502 S Main St in Yorkville or with the Kane County Recorder, depending on which side of the line the home sits on.

For step three, the Village of Montgomery Building Division posts monthly building permit logs back to 2021, which can help you date a roof or deck job. Boulder Hill homes get permits from the Kendall County Building Department instead, so check there for those records.

On step six, the IRS instructions for Form 1099-S let the closing agent skip the form on a principal residence sale of $250,000 or less, or $500,000 or less if you’re married, when each seller signs a written certification that the full gain is excludable. If you do get a 1099-S, IRS Topic 701 says you must report the sale even if all the gain is excluded.

Publication 523 also says to keep your basis records until three years after the due date of the return for the year you sell. Save the new closing statement with them, because your CPA will need it if capital gains tax is on the table.

Capital gains tax questions Montgomery sellers ask

Check your dates and your basis before you list

If you pass the tests and your gain fits under the limit, capital gains tax never comes up. When it does, the fix is usually timing or paperwork, and both are easier to handle before your home hits the market.

If you’re selling in Montgomery, Oswego, Yorkville, or anywhere in Chicago’s Western Suburbs, I’ll build you a net sheet, help you pull your purchase and permit records, and set a closing date that works with your CPA’s advice. See what’s happening locally on my Montgomery, IL real estate page. Call or text Kealan at 630-425-8815.

About Kealan O’Neil
Kealan O’Neil is the Designated Managing Broker and founder of O’Neil Property Group, an independent real estate brokerage based in Yorkville, Illinois. He and his team help buyers and sellers in Yorkville, Oswego, Montgomery, and the surrounding Kendall and Kane County communities, and he owns and manages a local rental portfolio, so he approaches every decision as both a broker and an investor. Call or text Kealan at 630-425-8815.

This post is general information about real estate in the Fox Valley, not legal, tax, or financial advice. Real estate laws, tax rules, and municipal ordinances change, and how they apply depends on your specific situation. Talk with a licensed attorney, CPA, or lender before making decisions about a purchase, sale, or tax matter. O’Neil Property Group is a licensed Illinois real estate brokerage.