Rev. Proc. 2026-35: Special-Use Valuation Cap $1,500,000, 6166 2-Percent Portion $2,010,000 for 2027 Estates

The two 2027 figures next to the previous nine years

Both numbers are inflation adjustments the Code tells the IRS to publish each year. Section 2032A(a)(2) caps the reduction at $750,000 and 2032A(a)(3) indexes it from 1997, rounding down to a multiple of $10,000. Section 6601(j)(3) does the same for the $1,000,000 amount inside the 2-percent portion. Each December the IRS lists them in the annual Revenue Procedure; the 2027 one is Rev. Proc. 2026-35, with the news release IR-2026-133 dated November 5, 2026.

Source: the annual IRS revenue procedures listed in the last column, each saved and read on November 7, 2026. The 2018 exclusion amount is from Rev. Proc. 2018-18 (IRB 2018-10, March 5, 2018), which replaced the pre-reform $5,600,000 in Rev. Proc. 2017-58 and did not change the 2032A or 2-percent figures. The tax column is our arithmetic: 40% of the dollar amount, the rate above $1,000,000 in 26 U.S.C. 2001(c).

Two observations from the series. First, the series is steady except for the 2022 to 2024 inflation years: the cap rose $10,000 in 2021, then $40,000, $80,000, $80,000, $30,000, $40,000 and $40,000 (our arithmetic). Second, the two figures come from the same cost-of-living factor applied to different bases ($750,000 and $1,000,000), so they must be consistent. For 2027 a factor between 2.01 and 2.0133 fits both published numbers: $750,000 times it rounds down to $1,500,000, and $1,000,000 times it rounds down to $2,010,000 (our arithmetic). The 2026 pair fits a factor of about 1.9467 to 1.95 the same way, which is a sanity check on both figures rather than a new fact.

How special-use valuation (2032A) cuts a farm or business valuation

The estate normally values land at its highest and best use. If the land is a working farm on the edge of a growing town, that can be far above what its farm use would support. Section 2032A(a)(1) lets the executor elect, for the estate tax, to value qualified real property at its value for the use under which it qualifies. The election is made on a timely filed Form 706 with the agreement and notice of election, and 26 CFR 20.2032A-8(a)(1) says that “this election is irrevocable.” Section 2032A(a)(2) then limits how much value can be taken off, and that limit is the figure Rev. Proc. 2026-35 resets to $1,500,000 for 2027.

The tests, one by one

Source: 26 U.S.C. 2032A as published by the Legal Information Institute and 26 CFR 20.2032A-3 and 20.2032A-8, read November 7, 2026.

For a reader with rental real estate the key line is the regulation’s: “The mere passive rental of property to a party other than a member of the decedent’s family will not qualify.” A building leased to tenants through a manager, with the owner collecting rent, is investment, not a qualified use. Land leased to the decedent’s own operating business, or farmed by a family member who materially participates, is different; the regulation says leased land can qualify only if the separate business qualifies as a closely held business under 6166(b)(1) (our reading). Our guide to rental property and the active-business question is the Section 6166 and rental real estate page.

A worked reduction under the 2027 cap (our arithmetic)

An estate of a 2027 decedent includes a family farm worth $4,000,000 at its highest and best use, which would be $2,200,000 for farming under the 2032A(e)(7) formula (both assumed). The unlimited reduction is $1,800,000, but the Rev. Proc. 2026-35 cap is $1,500,000, so the property goes on the return at $2,500,000. At the 40% top rate, a cap fully used saves $600,000 of federal estate tax. The same farm in an estate of a 2026 decedent is valued at $2,540,000 with the $1,460,000 cap, saving $584,000, so the 2027 year is worth $16,000 more (our arithmetic; it assumes the estate is already in the 40% bracket and ignores state tax). If the farm-use value were $3,400,000, the reduction would be $600,000, under the cap, and the cap would not matter.

A worked eligibility check (our arithmetic)

Take a 2027 estate whose adjusted value of the gross estate is $10,000,000. The 50% test needs at least $5,000,000 of qualified-use property passing to qualified heirs, and the 25% test needs at least $2,500,000 of qualified real property among that. Miss either and the election fails regardless of the cap. Separately, the land must have been owned and in qualified use, with material participation by the decedent or family, for at least 5 of the 8 years before death.

What the 10-year recapture costs (our arithmetic)

Suppose the 2027 estate used the full cap across two parcels: parcel A with a reduction of $900,000 (qualified-use value $1,600,000) and parcel B with $600,000. The estate-level “adjusted tax difference” is, simplified to a flat 40%, $600,000. If the qualified heir sells parcel A to an unrelated buyer for $2,800,000 within 10 years of death, section 2032A(c)(2)(A) imposes the lesser of (i) the adjusted tax difference attributable to A, which is $600,000 times $900,000 over $1,500,000 = $360,000, and (ii) the amount realized less the qualified-use value, $2,800,000 minus $1,600,000 = $1,200,000. The additional tax is $360,000. The real calculation uses the actual estate tax with and without the election and has more rules (family dispositions, partial dispositions and others), so treat this as an illustration of the structure.

How Section 6166 uses the $2,010,000 figure

The full 6166 mechanics, the Rev. Rul. 2006-34 rental cases and a 14-year schedule for a 2026 death are on our Section 6166 and rental real estate page; we do not repeat them. What this page adds is the 2027 number and what it does.

Under 26 U.S.C. 6166(a)(1), if the value of an interest in a closely held business “exceeds 35 percent of the adjusted gross estate, the executor may elect to pay part or all of the tax imposed by section 2001 in 2 or more (but not exceeding 10) equal installments.” Under 6166(a)(3) the first installment is due no more than 5 years after the section 6151(a) payment date, and the rest follow a year apart, so the last of 10 installments falls up to 14 years after the normal due date (our arithmetic). Interest for the first 5 years is paid annually (6166(f)(1)); after that it is paid with each installment (6166(f)(2)).

The interest rule is in 26 U.S.C. 6601(j). Interest “on the 2-percent portion of such amount shall be paid at the rate of 2 percent,” and on the rest at “a rate equal to 45 percent of the annual rate provided by subsection (a).” The 2-percent portion is the lesser of the deferred tax and the tentative tax on $1,000,000 (indexed) plus the exclusion amount, less the applicable credit. Rev. Proc. 2026-35 section 3.56 supplies the indexed $1,000,000 as $2,010,000. The IRS underpayment rate for individuals is 7% for the quarter beginning October 1, 2026 (IR-2026-98); 45% of it is 3.15% (our arithmetic). The quarterly rate for 2027 is not yet published.

A same-estate comparison: 2026 death vs 2027 death (our arithmetic)

A decedent leaves a $23,000,000 gross estate with $1,000,000 of 2053 and 2054 deductions, so the adjusted gross estate and the taxable estate are $22,000,000. No spouse, no prior gifts, no state tax. Inside the estate is an operating business worth $12,000,000 after removing passive assets, which is 54.5% of the adjusted gross estate and clears the 35% test.

Source: Rev. Proc. 2025-32 sections 2.14 and 4.51; Rev. Proc. 2026-35 sections 3.44 and 3.56; 26 U.S.C. 2001(c), 6166(a) and 6601(j); IR-2026-98 for the 7% rate. All figures are our arithmetic on assumed facts. Year-1 interest ignores that payments reduce the 2-percent portion proportionally (6601(j)(4)) and that the underpayment rate resets every quarter.

Most of the difference between the two columns is the $480,000 higher exclusion, which cuts the 2027 tax by $192,000. The larger 2-percent slice moves only a modest amount of interest: with a 7% rate the extra $28,000 of tax at 2% instead of 3.15% saves about $322 in the first year (our arithmetic). That is why the 2-percent figure is better read as a ceiling on the cheap part of the loan than as a driver of the decision.

Holding entities, rentals and the active-business line

Three rules in the statute decide whether real estate held in a company reaches the 35% test. First, 6166(b)(9)(A): for the 35% test and the deferral amount, “the value of any interest in a closely held business shall not include the value of that portion of such interest which is attributable to passive assets held by the business.” A passive asset is any asset not used in carrying on a trade or business (6166(b)(9)(B)). Second, 6166(b)(8)(A) lets “the portion of the stock of any holding company which represents direct ownership” in a business company count as stock in that company in the cases it describes. Third, acceleration: if distributions, sales or withdrawals add up to 50 percent or more of the value of the interest, the unpaid tax becomes payable on notice and demand (6166(g)(1)(A)). A landlord whose real estate is run by an unrelated manager is the case the Rev. Rul. 2006-34 analysis on our companion page covers.

What changes between a 2026 and a 2027 death

Source: the documents in the last column. The IRS revenue procedure covers the dollar amounts only; the percentages and counts come from the Code and are unchanged by it.

Our companion pages carry the rest of the 2027 package: the 2027 estate and gift exclusions, annual exclusion and noncitizen spouse figures and the 2027 income tax brackets and standard deduction. The 2026 basic exclusion and state-tax picture is in our estate tax exemption guide, and what the return itself asks is in the Form 706 instructions guide.

What a reader can do with this

• Check whether you are above the line at all. For a 2027 death the federal tax starts above $15,480,000. Special-use valuation and 6166 are used by estates that owe tax; both are irrelevant below the exclusion unless a state tax applies.
• Sort the real estate into three piles. Land farmed by the family or used in the family’s own operating business (candidate for 2032A and 6166); rentals run by the owner (6166 analysis under Rev. Rul. 2006-34); passive rentals through managers or pooled vehicles (usually neither).
• Compute the two percentages. Qualified-use property over the adjusted value of the gross estate (50% and 25% under 2032A) and the active business over the adjusted gross estate (35% under 6166), with passive assets taken out of the business value.
• Put the cap and the slice in dollars. A cap of $1,500,000 is worth at most $600,000 of tax at 40%; the 2-percent portion tops out at a tax of $804,000 (our arithmetic). Compare them with the actual numbers in your estate.
• Check the holding period on paper. The 8-year and 5-year material-participation record, the 10-year recapture period and the 50% acceleration rule are conditions that last long after the death, so who the heirs will be matters.
• Know the date of the figures. These are 2027 numbers for deaths from January 1, 2027. A death in December 2026 uses the 2026 pair.

Who decides. Whether to elect 2032A, 6166, or neither, and how to hold farmland or rentals beforehand, is for an estate-planning attorney and a CPA who prepares the Form 706; a financial adviser can model the liquidity to pay installments. Nothing here is a recommendation to elect either section.

This is analysis of public documents, not investment, legal or tax advice.

FAQ

Sources, read and saved on November 7, 2026: Internal Revenue Service, Rev. Proc. 2026-35 (sections 3.44, 3.45 and 3.56) and IR-2026-133 of November 5, 2026; Rev. Proc. 2025-32, 2024-40, 2023-34, 2022-38, 2021-45, 2020-45, 2019-44, 2018-57, 2018-18 (IRB 2018-10) and 2017-58; IR-2026-98 of August 21, 2026; 26 U.S.C. 2001, 2032A, 6166 and 6601 and 26 CFR 20.2032A-3 and 20.2032A-8 (Legal Information Institute text). Worked examples are our arithmetic on assumed facts. This is analysis of public documents, not investment, legal or tax advice.