What if you could turn one River North door into several, without taking an immediate tax hit? If you own a condo you’ve rented out and you’re craving more income and scale, a 1031 exchange could be your path into multifamily. In this guide, you’ll learn how the rules work, what Chicago costs to plan for, and a step-by-step plan to get from listing to closing, on time. Let’s dive in.
How a 1031 exchange works
Qualifying property
A 1031 exchange lets you defer federal capital gains tax when you sell investment real estate and buy other like-kind real estate. For real property, like-kind is broad, so you can trade a condo for a multifamily building if both are held for investment or business use. You report the exchange on IRS Form 8824 and follow its instructions. See the IRS guidance on reporting and rules in the Instructions for Form 8824 for details and examples (IRS Form 8824 instructions).
45-day and 180-day rules
Two deadlines control your timeline:
- You must identify replacement properties in writing within 45 days of selling your condo.
- You must acquire the replacement property within 180 days of the sale. The two periods run at the same time.
Missing either deadline typically disqualifies the exchange. Review the timing details and identification methods in this overview of the 45 and 180 day rules (1031 timeline guide).
Avoiding taxable boot
Any cash you receive, or a reduction in your mortgage balance, can be taxable “boot.” You can avoid mortgage boot by replacing equal or higher debt on the new property or by adding outside cash at closing. Learn the key boot concepts and common solutions in this mortgage boot guide (mortgage boot explained).
Why trade condo to multifamily
Trading a single River North condo for a multifamily building lets you scale income streams and diversify across multiple residents. You can reinvest pre-tax dollars, since a successful exchange defers capital gains and depreciation recapture per IRS rules (IRS Form 8824 instructions). The tradeoff is more active management, bigger inspections, and different financing terms compared with a residential condo loan.
Chicago costs and compliance
Transfer taxes to expect
In Chicago, transfer taxes apply even when you use a 1031 exchange. They do not invalidate the exchange, but they reduce the net proceeds you can reinvest.
- Illinois state transfer tax is $0.50 per $500 of consideration.
- Counties may add up to $0.25 per $500.
- The City of Chicago’s portions total $5.25 per $500. The city’s official transfer tax information and filing portal are here (City transfer tax overview).
Plan these costs into your proceeds and boot calculation, and verify current rates just before closing.
Landlord and occupancy rules
Buying multifamily in Chicago comes with local compliance steps. Buildings with 4 or more dwelling units require a Certificate of Occupancy. Confirm that the building’s occupancy, permits, and any open violations are in order during due diligence (Certificate of Occupancy).
Chicago’s Residential Landlord and Tenant Ordinance applies to most rental units and sets rules for leases, deposits, notices, and more. If you will own and operate apartments, you must understand these obligations (Chicago RLTO).
Step-by-step plan
Before you list
- Confirm investment use. If there was any personal use, consider the safe harbor in Revenue Procedure 2008-16, which generally involves renting for at least two years with limited personal use (safe harbor overview).
- Engage a qualified intermediary before closing so you never touch the sale proceeds. The QI holds funds and documents the exchange per IRS rules (IRS Form 8824 instructions).
- Ask your CPA or tax attorney to model scenarios so you understand debt replacement, basis, and potential boot.
Your 45-day strategy
Use one of the IRS identification rules to name your replacement properties within 45 days. Most exchangers use the three-property rule or the 200 percent rule to keep options open. Put your list in writing and deliver it to your QI on time. Review timing and identification tactics here (1031 timeline guide).
Financing for multifamily
Expect different underwriting for 5-plus unit properties. Lenders focus on debt service coverage, reserves, and the property’s net operating income. Start with early conversations so your loan can close within 180 days. See an overview of multifamily loan types and rate drivers here (multifamily loan overview).
Due diligence essentials
Your checklist will be more robust than a condo resale. Request and verify:
- Rent roll, leases, and trailing-12 income and expense statements.
- Unit-by-unit inspections and building systems, plus capital expenditure history.
- Title, survey, zoning and Certificate of Occupancy, permit and code enforcement histories, and any open violations.
Use a comprehensive checklist to stay organized during your inspection period (multifamily due diligence checklist). Cross-check occupancy requirements with the city’s guidance (Certificate of Occupancy).
Closing and reporting
- Close on your replacement property within 180 days of your condo sale. Your QI will wire exchange funds to closing (1031 timeline guide).
- Pay applicable transfer taxes and standard closing costs.
- File IRS Form 8824 with your tax return for the year of the sale (IRS Form 8824 instructions).
Common mistakes to avoid
- Letting sale proceeds hit your account instead of the QI’s account.
- Choosing a replacement with lower value or lower debt without planning for mortgage boot or adding cash at closing (mortgage boot explained).
- Underestimating time for multifamily financing, inspections, and repairs within the 180 day window.
- Skipping Chicago-specific checks like occupancy, RLTO obligations, and open code violations (Chicago RLTO).
Is the market right now?
Recent Chicago reports point to healthy multifamily demand, low vacancies, and cap rates that vary by submarket and asset class. This backdrop can support a condo-to-multifamily move, provided your underwriting reflects current rates and local operating costs. Review the latest metro snapshot to frame expectations on rents, vacancy, and pricing (Chicago multifamily market report).
Your next move
If you’re ready to trade a River North condo into multifamily, line up your QI, financing, and short list of target buildings before you list. A tight plan helps you hit the 45 and 180 day deadlines, avoid boot, and buy the right asset for your goals.
If you want a seasoned team to quarterback the whole process, from pricing your condo to sourcing and closing the replacement, let’s talk. My team and I live in both worlds, luxury selling in River North and multifamily acquisitions across Chicago. Start your plan with Amanda Stapleton.
FAQs
What is a 1031 exchange for condos and multifamily?
- It is a tax-deferred swap of investment real estate, so you can sell your River North investment condo and buy a like-kind multifamily property while deferring federal capital gains tax when you follow IRS rules (IRS Form 8824 instructions).
How do the 45 and 180 day deadlines work in a 1031?
- You have 45 days after selling your condo to identify replacement properties in writing and 180 days to close on the purchase, and both clocks run at the same time (1031 timeline guide).
What transfer taxes will I pay in Chicago on a 1031?
- Illinois, Cook County, and the City of Chicago impose transfer taxes that still apply in a 1031, including Chicago’s $5.25 per $500 combined city portions; these costs reduce your reinvestable proceeds but do not invalidate the exchange (City transfer tax overview).
What is mortgage boot in a 1031 exchange?
- If your replacement property has less debt than the property you sold, the debt relief can be taxable mortgage boot; you can avoid it by taking equal or higher debt or by adding cash at closing (mortgage boot explained).
Do I need a Certificate of Occupancy for a Chicago multifamily?
- Buildings with four or more dwelling units require an appropriate Certificate of Occupancy, so verify it and any permit or code issues during due diligence (Certificate of Occupancy).
Can I live in a unit after I complete my 1031 exchange?
- You can, but many investors rely on a safe harbor that involves holding the property for rental with limited personal use for at least two years before converting a unit to personal use (safe harbor overview).
