Can rental real estate qualify for section 6166 estate tax installments?
Key takeaway
Rental real estate can qualify for section 6166 installments when the owner's activity with the property supports treating it as a closely held business interest. An IRS revenue ruling describes factors for that judgment. Practitioners describe passive rentals, where the landlord performs no duties or services, as excluded. The qualifying interest must also exceed 35 percent of the adjusted gross estate.
What the installment election allows
Section 6166 lets an executor elect installment payment of part of the estate tax when the gross estate includes a closely held business interest. The IRS instructions limit the installments to the part of the tax attributable to the business.
Under federal law, the election turns on size. When a qualifying closely held business interest exceeds 35 percent of the adjusted gross estate, the executor may elect to pay some or all of the section 2001 tax in 2 to 10 equal installments.
A rental owner's estate therefore faces the percentage test and those further requirements together.
Passive rentals and active businesses are treated differently
Practitioners state that section 6166 applies to active businesses and excludes passive assets such as rental real estate where the landlord performs no duties or services.
Rental activity beyond that description raises a different question, and federal guidance addresses it directly.
An IRS revenue ruling identifies factors for assessing whether a deceased owner's activity with real property supports treating the interest as a closely held business interest under section 6166. The analysis looks at what the owner actually did with the property.
How passive assets affect the 35 percent test
In the commentary's example, a decedent's interest in a corporation falls below 35 percent of the adjusted gross estate once passive assets are set aside, so the interest fails the test.
For an owner whose estate holds rental property alongside an operating company, the passive or active character of the rentals therefore bears on whether the 35 percent threshold is met.
Estates that hold several kinds of assets
An estate that holds rental property alongside other assets applies the election only to the business part.
Rental holdings enter the analysis through the definition of a closely held business interest. If the owner's activity with the real property supports business treatment, the interest can be measured against the 35 percent threshold. If the landlord performs no duties or services, commentary places the rental among the passive assets that are excluded.
Common questions
Does a landlord who performs no duties or services meet the business test?
Practitioners describe the installment election as reaching active businesses and leaving out passive assets, with rental real estate run by a landlord who performs no duties or services given as the example. Federal guidance describes factors for judging a deceased owner's activity with real property.