If you use an illusion, you are calculated as if you were that race. Nothing more, nothing less.
Here is an example of a faction table:
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If you were a High Elf, and you cast Illusion: Gnome, you would use the Gnome portion of the table, instead of High Elf. That's really all there is to it. The total impact of faction is composite of the base, your class, your race, your deity, faction modifiers (alliance spells), and your individual faction level (the tally of all +/- hits you've received).