What Is IRC 2033 and How Does It Apply to Property and Estates?

IRC Section 2033 plays a key role in estate taxation by determining what property is included in a decedent’s taxable estate. It ensures that any assets owned at the time of death are properly accounted for when calculating federal estate taxes, impacting heirs and beneficiaries. Understanding how this rule applies to different property types and ownership structures is essential for estate planning.

General Application

IRC Section 2033 requires that any property a person fully owns at death be included in their gross estate for federal tax purposes. Assets held solely in the decedent’s name, without joint ownership or beneficiary designations, are subject to estate tax. The value of these assets is determined as of the date of death and reported on the estate tax return (Form 706) if the total estate exceeds the federal exemption threshold, which is $13.61 million for 2024.

This provision applies to both tangible and intangible property. A personal bank account solely in the deceased’s name, individually held stocks and bonds, and unpaid wages or accrued income owed to the decedent are all included in the estate. Property in the process of being transferred but not yet legally changed before death may also be included. For example, if a decedent had signed a contract to sell real estate but the transaction had not closed, the property remains part of the estate. Similarly, if a lawsuit was pending and the decedent was expected to receive a settlement, the right to that payment is considered an estate asset.

Types of Property Included

Assets subject to IRC Section 2033 include real estate, personal property, business interests, and certain life insurance policies.

Real estate owned outright by the decedent, such as primary residences, vacation homes, and rental properties, is included in the taxable estate. This also applies to land, mineral rights, timberland, and farmland, which may have additional tax implications depending on their use and income potential.

Personal property with significant value, such as vehicles, artwork, jewelry, antiques, and collectibles, must be reported at fair market value. High-value items like rare coin collections or vintage automobiles can create liquidity challenges for heirs if estate taxes are due but the assets are not easily sold. Estate planners often recommend appraisals to ensure accurate reporting and avoid IRS disputes.

Business interests owned outright by the decedent are also included. Sole proprietorships are directly part of the estate since there is no legal distinction between the owner and the business. If the deceased held shares in a privately owned corporation or was a member of an LLC, valuation depends on ownership percentage, operating agreements, and any buy-sell arrangements. Family-owned businesses may require special planning to reduce estate tax burdens, such as using Section 6166, which allows deferred tax payments on closely held business interests.

Life insurance policies owned by the decedent at death are included in the estate’s value. If the deceased retained ownership rights—such as the ability to change beneficiaries, borrow against the policy, or surrender it for cash—the full death benefit is subject to estate tax. Many individuals use irrevocable life insurance trusts (ILITs) to remove policies from their taxable estate, provided ownership is transferred at least three years before death to avoid IRS scrutiny under the “three-year rule.”

Valuation Considerations

Determining the fair market value of estate assets is essential for calculating tax liability. The IRS defines fair market value as the price at which property would change hands between a willing buyer and seller, both having reasonable knowledge of relevant facts and neither being under compulsion to buy or sell.

For publicly traded securities, the IRS requires using the average of the highest and lowest trading prices on the decedent’s date of death. If the market was closed that day, the mean of the closest trading days before and after is used. If an estate holds a large position in a single stock, selling may depress prices, so estate planners sometimes use block discounts to argue for lower valuations.

Real estate valuation typically relies on appraisals, but the IRS may challenge valuations if they appear artificially low. Comparable sales, zoning restrictions, and property condition influence the appraised value. Estates may elect the alternate valuation date—six months after death—if property values decline, potentially reducing estate tax liability. This election must be applied consistently across all eligible assets and is only beneficial if it results in a lower total estate value.

Closely held business interests require specialized valuation methods. Since these businesses lack a readily available market price, valuation often involves income-based methods like discounted cash flow analysis or market-based approaches using industry comparables. Discounts for lack of marketability or minority interest may apply, but the IRS scrutinizes these adjustments closely. Courts have ruled against excessive discounts when they appear designed solely for tax reduction rather than reflecting genuine economic limitations.

Unusual Ownership Arrangements

Certain ownership structures complicate estate inclusion under IRC Section 2033, particularly when an individual’s interest in property is subject to restrictions or shared control.

Tenancies in common create fractional ownership where each co-owner holds a distinct, transferable share. At death, only the decedent’s percentage is included in the estate, requiring a precise valuation of the ownership portion. Discounts for lack of control or marketability may apply if the interest is not easily sold.

Life estates add complexity. When a person retains the right to use or derive income from property for life but does not hold full ownership, the underlying asset typically bypasses IRC 2033 inclusion. However, if the decedent retained an interest that allowed them to dictate future ownership or revoke the arrangement, the IRS may argue for inclusion under IRC Section 2036, which addresses retained life interests. The actuarial valuation of life estates and remainderman interests is determined using IRS tables, factoring in the decedent’s age and applicable interest rates.

Filing Obligations

Properly reporting assets under IRC Section 2033 is necessary for estate administration. Estates exceeding the federal exemption threshold of $13.61 million for 2024 must file Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return. This form details all assets owned at death, their valuations, and any applicable deductions. Executors must ensure all taxable property is accurately reported, including assets that may not have easily determinable values, such as closely held business interests or intellectual property rights.

Supporting documentation is critical to avoiding IRS disputes. Real estate appraisals, business valuation reports, and financial statements should be retained in case of an audit. If an estate elects to use the alternate valuation date, this must be consistently applied across all eligible assets, and the executor must demonstrate that the election results in a lower total estate value. Estates with international assets may also have additional reporting obligations, such as disclosing foreign bank accounts or real property holdings, which can trigger separate tax considerations under U.S. tax treaties and foreign reporting requirements.