Transfer tax, short-term rentals and the closing table

Illinois has no income tax surprises at a real estate closing, because the state starts from federal adjusted gross income and taxes a home sale exactly as the federal return does: an excluded gain is never seen, and a taxable gain is taxed at the flat 4.95% like any other dollar. The surprises are elsewhere. They are the transfer tax stamps, which are small outside Chicago and not small inside it; the property-tax credit a seller hands the buyer because Illinois bills a year late; and, for anyone who rents a room or a condo by the night, a state hotel tax that since July 2025 applies to short-term rentals and the platforms that book them.

Each of those has a federal tax consequence, and the settlement statement is where they are recorded. The closing agent does not sort them into deductible, basis and nothing; the return preparer does, usually a year later from a document nobody read at the time. This article is the sorting.

The transfer tax: state, county, and the home-rule layer

Illinois taxes the privilege of transferring real estate at 50 cents for every $500 of the price, or fraction of $500, under 35 ILCS 200/31-10. Every county adds 25 cents per $500. Together that is $1.50 per $1,000, or 0.15% of the price. On a $300,000 house the state and county stamps come to $450. The amount of any mortgage the buyer takes the property subject to is excluded from the base, which matters in family transfers but rarely in an ordinary sale. By custom and in the standard Illinois contract, the seller pays both the state and county stamps, though the parties can agree otherwise. The tax is declared on the state transfer declaration (the PTAX-203, now filed through the MyDec system in most counties) and collected by the recorder when the deed is recorded.

Home-rule municipalities can add their own transfer tax, and roughly a hundred have. Chicago’s is the one that changes the arithmetic. The city tax is $3.75 per $500, paid by the buyer, plus a Chicago Transit Authority supplement of $1.50 per $500 paid by the seller, for $5.25 per $500 in total, which is 1.05% of the price on top of the state and county 0.15%. A buyer 65 or older who pays $250,000 or less (verify) and lives in the property for a year can apply to the city for a refund of the CTA portion. The March 2024 Bring Chicago Home referendum, which would have replaced the flat city rate with higher marginal rates above $1 million and $1.5 million and a cut below $1 million, failed 53% to 47% (verify), so the flat rate stands for 2026.

What the closing statement means on the federal return

A transfer tax is never deductible as a tax. IRS Publication 523 is direct about it: transfer and stamp taxes paid by the seller are selling expenses, which reduce the amount realized on the sale; paid by the buyer, they go into the cost basis of the home. Either way the tax shows up only when gain is figured, and for most owner-occupants the gain is excluded anyway. The same is true of the other items in the column: commissions, the seller’s attorney fee, the owner’s title policy, recording and survey fees, and any points the seller paid for the buyer are selling expenses on the way out and basis on the way in.

What does not go into basis is anything about the loan. Lender fees, the appraisal the lender required, the credit report, mortgage insurance, and points on a purchase mortgage are not part of the cost of the house. Points on a loan to buy a main home are deductible as interest in the year paid for an itemizer; the rest is simply the cost of borrowing. Prepaid hazard insurance and the escrow deposits for future taxes and insurance are neither basis nor deduction; they are money set aside.

Real estate tax prorations are the line most often handled wrong, and Illinois makes it harder than most states because property tax is paid in arrears. The bill that arrives in 2027 is for 2026. A seller closing in August 2026 has lived in the house for eight months of a tax year whose bill has not been issued, so the seller gives the buyer a credit at closing for the seller’s share, usually computed at 105% or 110% of the most recent bill (verify) to allow for an increase, and the buyer pays the whole 2026 bill when it comes due in 2027. For federal purposes Publication 523 treats that credit as the seller paying tax: the seller deducts the share for the days of ownership (if the seller itemizes), and the buyer deducts only the share for the buyer’s days, even though the buyer wrote the check for all of it. A buyer who deducts the whole 2027 bill because the whole bill was paid in 2027 is deducting the seller’s tax.

The Illinois property tax credit at a closing

Illinois gives a credit on Schedule ICR of 5% of property tax paid on the principal residence, not allowed when AGI is over $250,000 single or $500,000 joint, and it follows the same arrears logic. IDOR’s Publication 108 says a seller may count both the prior year’s tax actually paid during the sale year and the current year’s prorated tax “offset against the sales price at the time of closing,” which is the credit given to the buyer. A buyer gets nothing for the house in the year of purchase; the seller paid the tax for the months before closing through the credit, and the buyer’s first qualifying payment is the bill paid the following year, and then only the share for the months the buyer owned and lived in the house. Taxes the seller reimbursed at closing cannot be claimed by the buyer. The settlement statement is the only record of these numbers, so it needs to be kept with the return for both the sale year and the year after.

The home-sale exclusion and the Illinois return

The federal exclusion of $250,000 of gain, $500,000 on a joint return, for a home owned and used as the main home for two of the five years before the sale, is covered in the federal article. The Illinois part is short. Illinois starts from federal AGI, and excluded gain is not in federal AGI, so Illinois never sees it. There is no Illinois addback, no separate Illinois test and no Illinois form. The reverse is also true: Illinois has no exclusion of its own, no reduced rate for capital gains, and no step-down for a long holding period, so every dollar of gain above the federal exclusion is Illinois income at 4.95%. The same goes for depreciation recapture on a home that was partly rented or used as an office; whatever is taxed federally is taxed by Illinois.

Two Illinois-specific notes. A nonresident who sells Illinois real estate has Illinois-source income on the taxable gain and files a nonresident return with Schedule NR, even if the gain is small; the exclusion still applies if the house qualified as the seller’s main home. And a part-year resident who sold the old house in the other state after moving to Illinois reports the gain, if any survives the exclusion, in the Illinois column, because it was received while an Illinois resident.

Short-term rentals: the hotel tax comes home

Illinois’s Hotel Operators’ Occupation Tax applies to receipts from renting rooms for fewer than 30 consecutive days. It is 6% of 94% of gross receipts (verify), which is 5% plus a 1% Build Illinois add-on, applied to a base that excludes the tax itself; the effective rate is about 5.64% of the room charge. Until 2025 most hosts assumed it was a hotel tax. The fiscal 2026 budget legislation and IDOR’s guidance, effective July 1, 2025 (verify), made explicit that a short-term rental of a house, condo, apartment or room is a hotel for this purpose, and that platforms such as Airbnb and Vrbo that collect the payment and arrange the booking are re-renters who must register and remit. From July 1, 2026 (verify), a platform that meets the hotel marketplace facilitator definition, with $100,000 or more (verify) of Illinois rental receipts over the prior twelve months, files Form RHM-1 and pays the tax on bookings it processes. Hosts who also take direct bookings must still register on MyTax Illinois (Form REG-1) and file their own RHM-1, monthly, quarterly or annually depending on volume, even for a period with no receipts.

Chicago adds its own layers. The city’s hotel accommodations tax is 4.5% (verify), and vacation rentals and shared housing units pay a 6% surcharge (verify) on top, for 10.5% to the city alone. Add the state tax, the 1% municipal hotel tax, the 2.5% Metropolitan Pier and Exposition Authority tax, the 2% Illinois Sports Facilities Authority tax and Cook County’s 1% (verify), and a Chicago short-term rental guest pays something over 23% in lodging taxes on the nightly rate (verify). As of January 2026 Airbnb collects and remits the Chicago taxes on Chicago bookings (verify); other platforms and direct bookings are the host’s responsibility, and Chicago also requires a shared-housing registration with the city before a unit can be listed. Many suburbs and downstate cities have their own hotel taxes of 3% to 7% that apply the same way.

None of this is income tax. The lodging taxes are collected from the guest and passed through, and the host reports them, where a platform has not already handled them, on returns that have nothing to do with the IL-1040. The income tax side is federal: rental income and expenses on Schedule E, or on Schedule C when the host provides hotel-like services, with the 14-day rule for a home rented fewer than 15 days a year (no income reported, no expenses deducted) and the personal-use limits when the host also lives there. Whatever net figure lands in federal AGI is Illinois income at 4.95%. A host who loses money on paper from depreciation has that loss in AGI too, subject to the federal passive-loss rules, and Illinois does not add it back.