Estate Tax Installments: Section 6166 and Rental Real Estate 2026

Who this is for: only estates above $15 million

The federal estate tax for a 2026 death starts above a $15,000,000 basic exclusion amount. Public Law 119-21 put that figure into 26 U.S.C. 2010(c)(3), and Rev. Proc. 2025-32 section 2.14 confirms it for calendar year 2026. Our estate tax exemption guide has the law and the IRS return counts. Because the rate above the line is 40% (26 U.S.C. 2001(c)), the net tax with no earlier taxable gifts and no other credits is simply 0.40 times the taxable estate above $15,000,000.

Source: 26 U.S.C. 2001(c) (the rate schedule: $345,800 plus 40% of the excess over $1,000,000), 2010(c)(3); Rev. Proc. 2025-32 section 2.14. The tax column is our arithmetic and ignores state death tax deductions, prior gifts and credits. The $2,000,000 to $16,940,000 steps follow from 345,800 + 0.40 x (estate − 1,000,000) − 5,945,800.

If everything goes to a surviving spouse the marital deduction usually leaves no tax at the first death, so the question moves to the second. Our Form 706 guide covers portability, and the state estate and inheritance tax list shows where a state tax can start far lower. Section 6166 defers only the federal tax.

The tests, one by one

Source: 26 U.S.C. 6166(a)-(d), as published by the Legal Information Institute and read on October 29, 2026. The Form 706 instructions add that the estate must meet the 35% requirement by both including in and excluding from the gross estate any gifts made in the 3-year period ending on the date of death.

The denominator is the adjusted gross estate: the gross estate reduced by the amounts deductible under section 2053 (expenses, debts, mortgages) or 2054 (losses). The instructions say plainly that no part of the state death tax deduction is subtracted. The numerator takes the business interest and subtracts the value of passive assets inside it. Our reading of the two together: a cash pile or a securities account parked inside an operating LLC lowers your numerator but leaves the denominator untouched, so it can push the ratio under 35%.

Does a rental count? What Rev. Rul. 2006-34 says

The statute asks whether the partnership, corporation or proprietor is “carrying on a trade or business.” The Instructions for Form 706 send the reader to Rev. Rul. 2006-34, 2006-26 I.R.B. 1171 (June 26, 2006) for real property interests. That ruling revoked Rev. Rul. 75-365 and the part of Rev. Rul. 75-367 about eight rented homes, and it states the rule: section 6166 “applies only with regard to an active trade or business, as distinguished from the mere management of investment assets.”

It also says what makes an unrelated manager a problem: using an unrelated property management company to perform most of the activities “suggests that an active trade or business does not exist.” The factors it will weigh are the time devoted to the business, whether an office and regular hours were kept, involvement in finding tenants and negotiating and executing leases, landscaping and other services beyond the premises, repairs and maintenance (personally made, arranged or supervised), and handling tenant requests and complaints. No single factor decides it. The activities of agents and employees count.

Source: Rev. Rul. 2006-34, 2006-26 I.R.B. 1171, Facts and Holdings (saved from IRB 2006-26). The ruling’s facts are simplified here.

Two details do the real work for a landlord. First, the test looks through to who does the work: a self-managed owner or a general partner who personally handles leasing, maintenance and repairs sits in Situation 1 or 4; one who has outsourced all of it is in Situation 2. Second, an ownership stake in the management company moves the answer, as Situation 3 shows. The ruling gives no hours threshold and no count of properties, so a borderline estate is a judgment on facts that an adviser has to document before the return is filed (our reading).

Which holdings usually fail the entity tests

Source: 26 U.S.C. 6166(b)(1) and (b)(9); Rev. Rul. 2006-34. The rows on syndicated interests, REIT shares and DSTs are our reading of the numbers in the statute, not a ruling.

The cost: 2% on a slice, 45% of the underpayment rate on the rest

Section 6601(j) replaces the normal underpayment rate for tax deferred under 6166. Interest on the 2-percent portion is 2%. Interest on the rest is 45% of the section 6601(a) rate. The 2-percent portion is the lesser of the deferred tax and the tentative tax on the sum of $1,000,000 (inflation-adjusted) and the applicable exclusion amount, less the applicable credit amount.

For a 2026 death, Rev. Proc. 2025-32 section 4.51 fixes the dollar amount at $1,940,000. On our arithmetic from the rate table, the tentative tax on $16,940,000 is $6,721,800 and the credit on $15,000,000 is $5,945,800, so the 2-percent portion tops out at $776,000 (0.40 times $1,940,000). The Form 706 instructions print the same $776,000 but introduce it with “For decedents dying in 2025,” which we read as a label error, since the figure only works with the 2026 inputs.

Each payment reduces the 2-percent portion in proportion (6601(j)(4)), so the slice stays the same share of the balance. The IRS underpayment rate for individuals is 7% for the quarter beginning October 1, 2026, compounded daily (IR-2026-98), so 45% of it is 3.15% for now (our arithmetic). It resets each quarter.

A worked estate (our arithmetic)

A decedent dies in 2026 with a $30,000,000 gross estate, $1,000,000 of Schedule J, K and L deductions and no spouse and no prior gifts. Inside the estate is an active real estate business, run by the decedent and a salaried staff, with $18,000,000 of business-use value after passive assets are removed.

• Adjusted gross estate: $30,000,000 − $1,000,000 = $29,000,000.
• Test: $18,000,000 / $29,000,000 = 62.07%, above 35%.
• Net estate tax: 0.40 x ($29,000,000 − $15,000,000) = $5,600,000.
• Deferrable tax: $5,600,000 x 62.07% = $3,475,862. The other $2,124,138 is due nine months after death.
• Share at 2%: $776,000 / $3,475,862 = 22.33%. Blended rate with the underpayment rate at 7%: 0.2233 x 2% + 0.7767 x 3.15% = 2.893% a year.

Source: our arithmetic from 26 U.S.C. 6166(a) and (f) and 6601(j); Rev. Proc. 2025-32 section 4.51; IR-2026-98. Simple annual interest, no daily compounding, and the underpayment rate held at 7%; the real bill moves with each quarter’s rate. Total interest over the 14 years is $955,374; the same balances at the full 7% would cost $2,311,448, a difference of $1,356,075.

A smaller estate shows the other end. With a $17,000,000 taxable estate and a business worth half of the adjusted gross estate, the net tax is $800,000 and the deferrable part is $400,000, which sits entirely inside the $776,000 cap. All of it earns 2%, or $8,000 a year (our arithmetic).

The heirs still owe the whole principal. Whether the deferral rate beats selling property or borrowing to pay the tax on day one is arithmetic for the estate’s own numbers, not something a rate table settles.

What the IRS can require, and what ends the deal

• Security. The Form 706 instructions say the IRS may require a surety bond, or the executor may consent to the section 6324A special lien instead. Under 6324A the lien property is capped at the deferred amount plus the “required interest amount,” which is the interest for the first 4 years; the instructions describe it as the total deferred tax plus 4 years of interest. Every person with an interest in the designated property must sign the agreement.
• Acceleration by disposition. If distributions, sales, exchanges or other dispositions of the interest, plus withdrawals of money or property from the business, reach 50% of its value, the unpaid tax is due on notice and demand (6166(g)(1)(A)). Transfers to the people who inherit it under the will or by law are not a disposition (6166(g)(1)(D)), and a stock redemption under section 303 has its own rule.
• Late payments. A principal or interest payment that is not made on its date lets the IRS demand the whole unpaid tax (6166(g)(3)(A)). A payment made within 6 months of its date avoids that, and instead carries a penalty of 5% of the payment for each month or fraction (6166(g)(3)(B)).
• Estate income. If the estate has undistributed net income for a tax year ending on or after the first installment due date, it must pay that amount toward the deferred tax (6166(g)(2)).
• No deduction for the interest. The Form 706 instructions, in the Schedule K discussion, say that if you elect installments “you may not deduct the interest payable on the installments.”

Special use valuation (section 2032A): a different tool with a $1,460,000 cap

Section 2032A lets the executor value qualifying farm or business real property at its qualified use value instead of its best-use market value. For 2026 deaths the total reduction in value cannot exceed $1,460,000 (Rev. Proc. 2025-32 section 4.41; the statutory base is $750,000, indexed). In the Code the property must pass to a qualified heir and meet these tests:

Source: 26 U.S.C. 2032A(a)-(c) and Rev. Proc. 2025-32. 26 CFR 20.2032A-3(c) still mentions a 15-year period; the statute says 10 years.

For a landlord the key line is in Regulation 20.2032A-3(b)(1): “The mere passive rental of property to a party other than a member of the decedent’s family will not qualify,” and the term “business” is not as broad under 2032A as under section 162. So a rental portfolio that can pass section 6166 after Rev. Rul. 2006-34 may still fail 2032A, which also needs family material participation. Where property is held through an entity, the regulation sends it back to the 6166 closely held business tests as well.

An illustration (our arithmetic): qualifying real property is worth $5,400,000 at highest and best use and $3,200,000 for its qualified use. The reduction of $2,200,000 is capped at $1,460,000, so the return shows $3,940,000. At a 40% marginal rate the cap saves $584,000 of tax, only if the estate is taxable at the margin. The election is made on the return, is irrevocable, and requires the agreement of every person with an interest in the property (2032A(d)). The values used for the 35% test are the 2032A values if the election is made, per the instructions.

How the election is made on Form 706

Source: Form 706 (Rev. August 2025), Instructions for Form 706 (Rev. July 2026), 26 CFR 20.6166-1, 26 U.S.C. 6166(d) and (h).

The timing is the part that catches people. The statute lets the election be made by the return due date including extensions, but a Form 4768 extension to file does not extend the time to pay, and the first installment is measured from the 6151(a) date, the nine-month date (6166(a)(3)). See our Form 706 guide for how that date is counted. The tax that is not deferred is due on the nine-month date.

What a reader can do with this

• Add up the estate against $15,000,000 first. Gross estate plus adjusted taxable gifts. If the taxable estate is not over the line, or the whole estate passes to a spouse, stop here.
• Write the 35% fraction with real numbers. Business interest less passive assets over the gross estate less Schedules J, K and L. Test it with and without any gifts made in the last 3 years.
• Sort each property by who actually runs it. For every rental, note who finds tenants, who signs leases, who orders and checks repairs, how many hours and where the office is. A property manager’s contract and invoices are the first documents Rev. Rul. 2006-34 would have you read.
• Check the entity count. For an LLC or LP, count partners at the date of death and the decedent’s share of capital. More than 45 partners and under 20% is the usual way a syndicated holding fails.
• Price the interest. Compare the 2% slice and 45% of the underpayment rate with the cost of selling or borrowing against property to pay the tax on day one.
• Ask what the bond or lien will cost. A 6324A lien needs every interested person’s signature, and it ties up property for the deferral period.
• Do not plan sales during the deferral without checking the 50% line. The unpaid tax comes due once dispositions and withdrawals reach 50% of the interest.

Heirs who receive the property also need its value for basis; our step-up in basis guide explains what to do with the Form 706 value.

Who decides

Whether a set of rentals is a business under 6166, whether to elect 2032A as well and how to document the facts are legal and tax decisions that have to be made before the return is filed, usually within nine months of the death. The people who handle them are estate attorneys and CPAs who prepare Form 706; an adviser who looks at the whole estate can help line up the cash, the property and the deadline.

FAQ

Sources, read and saved on October 29, 2026: 26 U.S.C. 2001, 2010, 2032A, 6166, 6324A and 6601 (Legal Information Institute, Cornell Law School); 26 CFR 20.6166-1, 20.6166A-2 and 20.2032A-3; Rev. Rul. 2006-34, 2006-26 I.R.B. 1171 (irs.gov/pub/irs-irbs/irb06-26.pdf); Rev. Proc. 2025-32 (irs.gov/pub/irs-drop/rp-25-32.pdf), sections 2.14, 4.41 and 4.51; Form 706 (Rev. August 2025) and the Instructions for Form 706 (Rev. July 2026), Part III, Lines 1 to 3, and the Line 3 Worksheet; IRS news release IR-2026-98, “Interest rates remain the same for the fourth quarter of 2026” (August 21, 2026). Our tax figures, schedule and examples are arithmetic on those sources and are labelled as such. This is analysis of public documents, not investment, legal or tax advice.