Estate Tax Appraisal for Form 706

When a Form 706 gets filed, including when no tax is due

A return is required under IRC § 6018(a) when the gross estate, taken together with adjusted taxable gifts, exceeds the basic exclusion amount in effect under IRC § 2010(c) for the calendar year that includes the date of death. That amount is indexed annually and is not quoted here; your CPA or estate attorney will apply the figure for the year of death.

Many Form 706 filings are made by estates that owe nothing. The reason is portability: to give a surviving spouse the deceased spouse's unused exclusion (DSUE) under IRC § 2010(c)(5)(A), a complete and properly prepared Form 706 must be filed. Where the executor was not required to file under § 6018(a) and did not file on time, Rev. Proc. 2022-32 provides a simplified extension. It superseded the two-year window of Rev. Proc. 2017-34 and now runs to the fifth annual anniversary of the date of death, provided the return states at the top that it is "FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A)." That relief is not available to an estate that is required to file under § 6018(a).

Treas. Reg. § 20.2010-2(a)(7)(ii) provides a reduced-reporting rule for those same non- required estates: for property qualifying for the marital deduction under § 2056 or § 2056A or the charitable deduction under § 2055(a), the executor may report description, ownership, and beneficiary rather than a value, but only if the executor exercises due diligence to estimate the fair market value of the gross estate, including that property. The rule expressly does not apply where less than the entire value of an includible interest is marital or charitable deduction property, where a partial disclaimer or partial QTIP election is made, or where the value is needed to determine eligibility under § 2032 or § 2032A. Fractional interests and partial elections routinely fall outside it. Whether a given estate qualifies is a question for the return preparer, not the appraiser, and where the reduced-reporting rule does not apply, the property has to be appraised properly.

What the fair market value standard requires

Treas. Reg. § 20.2031-1(b) defines fair market value as the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The buyer and seller are hypothetical, not the actual heirs or the actual purchaser. The same paragraph directs that "[a]ll relevant facts and elements of value as of the applicable valuation date shall be considered in every case," and that fair market value is not to be determined by a forced sale price.

The regulation sets the standard of value; it does not prescribe a report format. What survives examination is a USPAP-compliant appraisal with a clearly stated retrospective effective date, a supported highest and best use conclusion, a genuine analysis of the applicable approaches to value, and a workfile that shows the reasoning. Automated valuation models and broker price opinions do not meet that description.

The Instructions for Form 706 reinforce the point on the reporting side. The Schedule A instructions tell the executor to "[e]xplain how the reported values were determined and attach copies of any appraisals," and the return checklist at the end of the instructions repeats: "Appraisals. Attach any appraisals used to value property included on the return."

Fractional and undivided interests

Estates frequently hold something less than 100 percent of a fee simple: a one-half community property interest, an undivided tenancy-in-common share, a life estate, or a remainder. The value of a fractional interest is not simply the pro rata share of the whole. In Propstra v. United States, 680 F.2d 1248 (9th Cir. 1982), the circuit that governs California: the Ninth Circuit sustained a 15 percent discount on a decedent's undivided one-half community property interest in real estate, holding that the willing buyer and willing seller of the regulation are objective and hypothetical, so the decedent's interest is not aggregated with the surviving spouse's matching interest.

The Tax Court has since worked out a partition-cost and holding-cost method for pricing that discount. It did so in the gift tax context in Ludwick v. Commissioner, T.C. Memo. 2010-104, where a married couple transferred their undivided one-half tenancy-in-common interests in a Hawaii vacation home to qualified personal residence trusts; the court modeled the cost and delay of a partition and arrived at a 17.2 percent discount. The posture matters, Ludwick was a gift tax case decided on Forms 709, not an estate, but § 20.2031-1(b) and its gift tax counterpart apply the same fair market value definition, and the analytical framework carries over. A discount has to be built from the facts of the specific interest. Neither 15 nor 17.2 percent is a safe harbor.

A real property appraisal covers the real estate itself. Where the decedent held an interest in a partnership, unincorporated business, LLC, or closely held corporation, Form 706, Part 4, line 11a. The instructions direct the executor to include full details for fractional interests in real estate on Schedule A, while the effective-discount statement triggered by line 11b is reported with Schedule F or Schedule G. Entity-level discounts for lack of control and lack of marketability belong to a separate business valuation; the real property appraisal is an input to it.

Alternate valuation means a second effective date

Under IRC § 2032(a), an executor who elects alternate valuation values property still held six months after death as of that six-month date, and values property distributed, sold, exchanged, or otherwise disposed of within those six months as of the date of disposition. In appraisal terms that is a second retrospective effective date and a second valuation assignment, not an adjustment to the first one.

The election is narrower than it looks. IRC § 2032(c) permits it only where it decreases both the value of the gross estate and the sum of the estate tax imposed by chapter 11 and the generation-skipping transfer tax imposed by chapter 13 with respect to property includible in the gross estate. An estate that owes no tax cannot satisfy that test, so alternate valuation is unavailable on a portability-only filing. Under § 2032(d) the election is made on the return, is irrevocable once made, and cannot be made at all if the return is filed more than one year after the due date including extensions.

Penalties, and why they discipline the report

Valuation misstatement penalties reach both the taxpayer and the appraiser. Under IRC § 6662(g)(1), a substantial estate or gift tax valuation understatement occurs when the value claimed on a subtitle B return is 65 percent or less of the correct value; § 6662(h)(2)(C) makes it a gross valuation misstatement, penalized at 40 percent rather than 20 percent, by substituting 40 percent for 65 percent. Critically, § 6662(g)(2) bars the penalty entirely unless the portion of the underpayment attributable to substantial estate or gift tax valuation understatements exceeds $5,000. Where no estate tax is due there is no underpayment, so on a portability-only return there is nothing for the taxpayer-level valuation penalty to attach to.

IRC § 6695A reaches the appraiser directly where the appraised value results in a misstatement within the meaning of § 6662(e), (g), or (h). The penalty is the lesser of (a) the greater of 10 percent of the underpayment attributable to the misstatement or $1,000, and (b) 125 percent of the gross income the appraiser received for preparing the appraisal. Under § 6695A(c) no penalty applies if the appraiser establishes that the value in the appraisal was more likely than not the proper value. Those are the terms an estate tax appraisal is written to meet.

Basis consistency is narrower than it is often described. IRC § 1014(f) caps a beneficiary's basis at the value finally determined for federal estate tax purposes, but § 1014(f)(2) limits that rule to property whose inclusion in the gross estate increased the estate's chapter 11 liability after allowable credits. The final consistent-basis regulations confirm the point: Treas. Reg. § 1.1014-10(c)(1)(ii) states that "[i]f, after the application of allowable credits, no estate tax liability is payable, no such property is subject to the consistent basis requirement." The § 6035 reporting duty is limited the same way, Treas. Reg. § 1.6035-1(b)(1) applies it only to an estate required to file under § 6018, and provides that a return filed for another purpose, such as electing portability under § 2010(c)(5), is not a required return. Where the duty does apply, the executor must file Form 8971 and furnish Schedule A statements to beneficiaries by the earlier of 30 days after the return's due date including extensions or 30 days after the return is filed.

None of that makes the number optional on a no-tax estate. Even where the consistency rule does not bind, the date-of-death fair market value reported on the return is the figure the heirs will use as their basis under IRC § 1014(a) when they eventually sell, and it is the figure they will have to defend.

Deadlines and engagement

Nine months moves quickly, particularly when a personal representative is appointed late or the estate's real property inventory is only assembled after the attorney is retained. Form 4768 buys six months to file but does not extend the time to pay, and if alternate valuation is in play the one-year outside limit of § 2032(d) is the real deadline. Retrospective assignments also depend on data that is easier to assemble sooner: date-of-death condition, occupancy, and market evidence from the period around the valuation date.

Kevin O'Brien, MAI, SRA, is a California Certified General Real Estate Appraiser, BREA certificate #3005065, listed on the ASC National Registry. Appraiser credentials are state- specific, and KO Appraisal accepts California property only. Standard turnaround is one to three weeks. Deposition and expert witness testimony are offered where the reported value is challenged.

Kevin founded KO Appraisal in 2023 after serving as a Senior Real Estate Appraiser at JP Morgan Chase and as an independent fee appraiser at MVT Appraisal. That earlier work included estates, condemnation, financing, and due diligence support, for clients including accountants, investment firms, law firms, lenders, and private and public agencies. Property types valued include neighborhood and community shopping centers, apartment complexes, single- and multi-tenanted industrial buildings, low- to high-rise office buildings, mixed- use facilities, and vacant land.

Office: 600 W Broadway, San Diego, CA 92101. Residential 760-685-8036, [email protected]. Commercial (619) 704-7070, [email protected].

Common questions

Sources

Every statutory and regulatory claim on this page traces to one of the following. Where a source could not be confirmed, the claim was removed rather than softened.

1. IRC § 6018(a): estate tax return required where the gross estate, with adjusted taxable gifts, exceeds the basic exclusion amount for the year of death.
2. IRC § 2010(c), basic exclusion amount, indexed annually; § 2010(c)(5)(A), DSUE portability election requires a timely filed, complete and properly prepared estate tax return.
3. Rev. Proc. 2022-32, 2022-30 I.R.B. 101: simplified method extending the time to elect portability to the fifth annual anniversary of death for estates not required to file under § 6018(a); return must be marked "FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A)." Supersedes Rev. Proc. 2017-34 (two-year window).
4. Treas. Reg. § 20.2010-2(a)(7)(ii): reduced value-reporting rule for marital and charitable deduction property on returns filed only for portability; requires due-diligence estimate of the gross estate and does not apply to partial interests, partial disclaimers or QTIP elections, or where value is needed for § 2032 or § 2032A.
5. Treas. Reg. § 20.2031-1(b): fair market value definition (willing buyer/willing seller, no compulsion, reasonable knowledge); all relevant facts and elements of value as of the valuation date to be considered; assessed value not to be used unless it equals fair market value.
6. IRC § 2032(a): alternate valuation at six months after death, or at date of disposition for property disposed of within six months; § 2032(c). Election allowed only if it decreases both the gross estate and the sum of the chapter 11 and chapter 13 taxes; § 2032(d), election made on the return, irrevocable, unavailable if the return is filed more than one year after the due date including extensions.
7. IRC § 1014(a): basis of property acquired from a decedent is its fair market value at death; § 1014(f), consistent basis rule; § 1014(f)(2), applies only to property whose inclusion increased the estate's chapter 11 liability.
8. Treas. Reg. § 1.1014-10(c)(1): consistent basis property must be property whose value increases the estate tax liability payable after allowable credits; § 1.1014-10(c)(1)(ii), if no estate tax liability is payable after credits, no property is subject to the consistent basis requirement.
9. Treas. Reg. § 1.6035-1(b)(1): § 6035 reporting applies only to estates required to file under § 6018; a return filed to elect portability is not a required return. § 1.6035-1(c)(3)(i). Form 8971 and Schedule A statements due by the earlier of 30 days after the return's due date including extensions or 30 days after filing.
10. IRC § 6662(g)(1): substantial estate or gift tax valuation understatement where claimed value is 65% or less of the correct value; § 6662(h)(2)(C), gross valuation misstatement substitutes 40%; § 6662(g)(2). No penalty unless the portion of the underpayment attributable to the understatement exceeds $5,000.
11. IRC § 6695A(b): appraiser penalty equal to the lesser of the greater of 10% of the underpayment or $1,000, and 125% of gross income received for preparing the appraisal; § 6695A(c). No penalty where the appraiser establishes the value was more likely than not the proper value.
12. IRS Form 706 (Rev. Aug. 2025), Part 4, lines 11a–11b; Instructions for Form 706 (Rev. Sept. 2025), Schedule A ("Explain how the reported values were determined and attach copies of any appraisals"), Line 11 instructions (full details for fractional interests in real estate reported on Schedule A), and the return checklist ("Appraisals, attach any appraisals used to value property included on the return"). Form 4768, automatic six-month extension of time to file.
13. Propstra v. United States, 680 F.2d 1248 (9th Cir. 1982), 15% fractional-interest discount sustained on a decedent's undivided one-half community property interest in real estate; hypothetical willing buyer/seller standard applied without aggregating the surviving spouse's interest.
14. Ludwick v. Commissioner, T.C. Memo. 2010-104 (May 10, 2010), gift tax case; undivided one- half tenancy-in-common interests in a Hawaii residence transferred to QPRTs; Tax Court applied a partition-cost and holding-cost analysis and allowed a 17.2% discount.
15. Uniform Standards of Professional Appraisal Practice (current edition), Standards 1 and 2, development and reporting of a real property appraisal.

Related reading

• Probate Appraisal in California
• The Alternate Valuation Date Under IRC § 2032
• Date of death appraisal
• Charitable Donation Appraisal for California Real Property