Despite strong evidence of heritability and growing discovery of genetic markers for major mental illness, little is known about how gene expression in the brain differs across psychiatric diagnoses, or how known genetic risk factors shape these differences. Here we investigate expressed genes and gene transcripts in postmortem subgenual anterior cingulate cortex (sgACC), a key component of limbic circuits linked to mental illness. RNA obtained postmortem from 200 donors diagnosed with bipolar disorder, schizophrenia, major depression, or no psychiatric disorder was deeply sequenced to quantify expression of over 85,000 gene transcripts, many of which were rare. Case-control comparisons detected modest expression differences that were correlated across disorders. Case-case comparisons revealed greater expression differences, with some transcripts showing opposing patterns of expression between diagnostic groups, relative to controls. The ~250 rare transcripts that were differentially-expressed in one or more disorder groups were enriched for genes involved in synapse formation, cell junctions, and heterotrimeric G-protein complexes. Common genetic variants were associated with transcript expression (eQTL) or relative abundance of alternatively spliced transcripts (sQTL). Common genetic variants previously associated with disease risk were especially enriched for sQTLs, which together accounted for disproportionate fractions of diagnosis-specific heritability. Genetic risk factors that shape the brain transcriptome may contribute to diagnostic differences between broad classes of mental illness.