Real Estate Investing Tax Basics

The IRS says: “The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death (Refer to Form 706).”i That is a simple statement, but the devil is in the details.

In the assessment of the estate taxes owed, the fair market value of the assets is used. You do not use the amount you paid for them or their value when you acquired them. Some may have lost value, and they would be taxed on the current market value at the time of death. The total value of all your assets is called the “Gross Value” of the estate by the IRS.

The Gross Estate consists of real estate, cash, stocks, bonds, other securities, insurance, trusts, business assets, annuities, personal property, artwork, and other assets. Certain deductions to the Gross Estate value are allowed. These may include mortgages, other debts, expenses for the administration of the estate, and property passing to some qualified charities and surviving spouses. There are other allowable reductions for some operating business interests, farms, or specific estates.

Once those allowable reductions are computed to arrive at the net value of the estate, the value of lifetime taxable gifts (those beginning in 1977) is calculated. Then the IRS says that the resulting tax is “then reduced by the available unified credit.” Most relatively simple estates do not require the filing of an estate tax return. Simple estates would normally include those holding only cash, publicly traded securities, small amounts of easily valued other assets, those with no special deductions or elections, or jointly held property.

The previous paragraphs have a lot of “may,” “certain,” and “specified” statements, and that leaves a huge amount of information open to IRS interpretation. To give you some perspective if your estate is required to file an estate tax return, Form 706 is 29 pagesii, and the instructions for filing Form 706 are 64 pages longiii.

To get you started in trying to first see if you must file, the IRS says: “A filing is required for estates with combined gross assets and prior taxable gifts exceeding $1,500,000 in 2004 – 2005; $2,000,000 in 2006 – 2008; $3,500,000 for decedents dying in 2009; and $5,000,000 or more for decedent’s dying in 2010 and 2011 (note: there are special rules for decedents dying in 2010); $5,120,000 in 2012, $5,250,000 in 2013, $5,340,000 in 2014, $5,430,000 in 2015, $5,450,000 in 2016, $5,490,000 in 2017, $11,180,000 in 2018, $11,400,000 in 2019, $11,580,000 in 2020, and $11,700,000 in 2021.” Wow, that is one sentence.

To further complicate matters, various limitations and dollar amounts specified in Form 706 are indexed annually for inflation. The basics of estate taxation for the simplest estates may not require the filing of Form 706, but the average financially savvy businessperson cannot keep up with the rules and annual changes. Seek the help of qualified estate planners, accountants, and tax experts.

i Estate Tax, IRS.gov

ii United States Estate (and Generation-Skipping Transfer) Tax Return, IRS.gov

iii Instructions for Form 706 (09/2020), IRS.gov

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