The IRS has ruled that certain real estate interests held by a decedent qualify as an interest in a closely held business and that any federal estate taxes attributable to the decedent's interest in the closely held business may be paid in installments.

The decedent in this ruling owned and operated 82 rental units on 20 parcels of real property. From the original acquisitions of the properties until the time of his death, he found tenants, negotiated leases, collected rents, and paid the expenses for the operation and maintenance of the rental units. He also performed almost all repairs and employed his daughter and his son to help him manage the operation. His tenants would call at all hours of the night if something was wrong, and either he or his son or daughter would respond.

The IRS ruled that the property will constitute a closely held business interest, and that the estate may be allowed to pay any resulting federal estate tax in installments.

According to §6166, if a decedent's interest in a closely held business exceeds 35% of the gross estate, the estate may elect to pay part or all of the resulting federal estate taxes in two or more (but not more than 10) equal installments.

Section 6166(b)(1)(A) defines "interest in a closely held business" to include an interest as a proprietor in a trade or business carried on as a proprietorship. However, past Revenue Rulings (75-365 and 75-367) resulted in rental properties not constituting an interest in a closely held business. In these two rulings, the owner of the property managed their operation and maintenance through the employment of third-party contractors.

But in this case (PLR 200114005, 4-6-2001), the IRS looked to Rev. Rul. 75-366, in which rental farm property was held to be an interest in a closely held business because the decedent paid 40% of the expenses, received 40% of the crops, and made almost daily visits to the property.

So, whether or not rental property will constitute an interest in a closely held business depends on the owner's level of involvement. If the decedent merely owned the properties and collected rents, this would constitute management of investment assets, and §6166 would not apply.