When an estate is large enough to require a federal estate tax return, the value of every asset it holds must be reported to the IRS on Form 706. For estates that include commercial real estate, that reporting obligation raises the stakes on valuation considerably. The IRS scrutinizes real property values, and an appraisal attached to a 706 has to be more than a number — it has to be a credible, fully supported opinion that can withstand examination. Here is what valuing commercial real estate for Form 706 actually requires.
What Form 706 is and when it applies
Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return, reports the assets of a decedent’s estate and calculates any federal estate tax owed. A return is generally required when the value of the gross estate, combined with certain lifetime gifts, exceeds the federal exemption amount — a permanent $15 million per person as of 2026 under the One Big Beautiful Bill Act, indexed for inflation. A 706 may also be filed when no tax is owed in order to elect portability of a deceased spouse’s unused exemption. Whether a given estate must file is a determination for the estate’s CPA or attorney; when a filing is required, each parcel of real property must be reported at its fair market value as of the date of death.
The standard: fair market value as of the date of death
The value reported on Form 706 is the fair market value of the property as of the decedent’s date of death — the price a willing buyer and willing seller would agree on, neither compelled and both reasonably informed. Because the effective date is the date of death, the appraisal is retrospective: it values the property as of that past date using the market evidence available then.
For commercial real estate, arriving at that value credibly means developing the approaches that fit the property — most often the income capitalization approach for income-producing assets and the sales comparison approach, with the cost approach where relevant — and reconciling them into a supported conclusion. A bare assessed value or rule-of-thumb estimate is not adequate for a 706.
Why a qualified appraisal protects the estate
The IRS pays particular attention to hard-to-value assets, and commercial real estate sits squarely in that category. An estate that supports its 706 with a qualified appraisal — independent, prepared to professional standards, and thoroughly documented — is far better positioned than one relying on an informal figure. A strong appraisal does several things at once: it substantiates the reported value, it documents the reasoning in a way an examiner can follow, and it establishes the basis the heirs will carry forward for the step-up. If the IRS questions the value, the appraisal and its workfile are what defend it.
Undervaluation carries real risk. Beyond a potential adjustment to the tax, the Internal Revenue Code provides for penalties when reported values are substantially understated. A defensible appraisal is the estate’s protection against that exposure.
What a 706 appraisal should contain
An appraisal prepared for estate tax purposes should clearly establish:
- The effective date — the date of death (or the alternate valuation date, if that election is made).
- The interest being valued — the specific ownership interest in the property, including any fractional or partial interest.
- The definition of value — fair market value, consistent with estate tax requirements.
- The approaches developed — with the data, comparables, and assumptions documented and the reconciliation explained.
- A supporting workfile — the evidence behind the opinion, retained so the value can be defended later.
Adherence to recognized appraisal standards (USPAP) underpins all of this and signals to the IRS that the analysis was developed credibly.
Fractional and partial interests
Estates frequently hold less than a whole property — an undivided fractional interest, an interest in an entity that owns real estate, or a tenancy-in-common share. Valuing these interests is not as simple as taking a percentage of the whole-property value; the lack of control and limited marketability of a partial interest can affect what it is worth. These situations call for an appraiser experienced in the issues they raise and careful coordination with the estate’s tax advisors, who address the legal and valuation-discount questions that follow.
Coordinating with the estate’s advisors
A 706 appraisal does not happen in isolation. The estate’s attorney and CPA determine filing requirements, elections, and reporting positions; the appraiser supplies the independent, supportable value the return relies on. The alternate valuation date election, portability, and the interplay between reported value and the heirs’ basis are all decisions where appraiser and advisor work in tandem. An appraiser who understands how the value will be used produces a more useful report.
The bottom line
Valuing commercial real estate for Form 706 demands an independent appraisal of fair market value as of the date of death, developed with the right approaches, documented thoroughly, and built to withstand IRS examination. For estates holding commercial property, a qualified appraisal is not a compliance checkbox — it substantiates the return, protects against undervaluation penalties, and establishes the basis the heirs will rely on for years. It is the foundation the whole filing stands on.
SM RE Inc. prepares independent commercial real estate appraisals for estate tax reporting across Southern California — documented to professional standards and built to support a Form 706 filing. Learn more on our Estate & Gift Tax Valuations page, or contact us to discuss a matter. This article is general information, not tax or legal advice; filing requirements should be confirmed with the estate’s CPA or attorney.
Frequently asked questions
Does every estate with real estate need a Form 706 appraisal?
No. Form 706 is generally required only when the gross estate plus certain gifts exceeds the federal exemption ($15 million per person in 2026), or when portability is elected. When a 706 is filed, commercial real estate should be supported by a qualified appraisal; the estate’s CPA or attorney confirms whether a return is required.
What value does the IRS require on Form 706?
Fair market value as of the decedent’s date of death — or the alternate valuation date, if that election is made. The value must reflect what the property would sell for between a willing, informed buyer and seller.
What happens if the reported value is too low?
Undervaluing real estate can lead to an IRS adjustment, additional tax, and potential penalties for substantial understatement. A qualified, well-documented appraisal is the estate’s best protection against that risk.