Form 706 Schedule A: Complete in a Few Simple Steps!

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Paul Sundin, CPA

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Schedule A is one of the most often completed schedules on Form 706. That’s because so many people have created large wealth through real estate. This should not be that much of a surprise.

In theory, Schedule A is not that challenging to complete. But there are a few complexities you must navigate to ensure that you don’t have any issues with the IRS.

In this guide, we will take a close look at Schedule A. Specifically, we will show you how to complete it, offer some sample language, and give you an example. Let’s get started.

What is Form 706 Schedule A used for?

Use Schedule A to summarize real estate holdings. Attach it to Form 706 and filed with the return. It must list the decedent’s real estate held or contracted to purchase. Number each parcel in the left-hand column.

Describe the real estate parcels in enough detail. The IRS should be able to quickly and efficiently identify them for valuation purposes. For each property, report the following:

  • Street address
  • Property area
  • Description of improvements made
  • Subdivision, lot, or block. 
  • For rural land include the range, township, landmarks, or additional identifying information.

Take a look at a sample description:

Personal Residence: 123 Main Street, Phoenix, AZ 85033, described as “Tract No. 4563 Lot 228” Parcel # APN 283855866. Value based on sales price at the close of escrow on January 12, 2022. Settlement statement included.

Real estate reported on Schedule A

Include all real estate owned solely by the decedent. In addition, you should include real property held as tenants in common. Tenants in common is where each tenant’s interest is separate from that of the other tenants in common and passes to their heirs upon death. 

Included in the definition of real estate would be the following:

  • Residential real estate, including homes and condos
  • Apartment buildings
  • Commercial or industrial real estate
  • Vacant land or lots
  • Mineral interests
  • Land easements
  • Interest in real estate sales contracts
  • Fractional shares of any tenancy in common
  • Cemetery lots with marketable value

Report the real estate at gross value and do not be reduce for homestead or any other noted exemption. Give a detailed explanation of how the reported values were determined and attach copies of any appraisals or settlement statements.

All real estate should have formal appraisals. Attach the appraisals to the estate return. Do not use tax‚Äźassessed values as they do not typically represent fair market value.

The exception to the appraisal requirement is when real property is sold within a year of the decedent’s death. If this is the case, the value reported on Form 706 is the sales price. 

Was the decedent under contract to buy any real estate? If so, make sure to report any real property under contract on Schedule A. Report the property’s total value and not simply the equity in the value column. Then deduct the unpaid part of the acquisition price on Schedule K.

Items not reported on Schedule A

Certain types of assets may be similar to real estate but are not included on Schedule A. As such, you should not report the following items on Schedule A:

  • Growing crops (Schedule F)
  • Royalty interests (Schedule F)
  • List real estate held as part of a sole proprietorship (Schedule F)
  • Value of shares owned in a coop (Schedule B).
  • Real estate included in the estate under section 2035, 2036, 2037, or 2038 (Schedule G).
  • Real estate included in the estate under section 2041 (Schedule H).
  • If an election is made under section 2032A, complete Schedule A and Schedule A-1.

What about mortgages?

If any real estate parcel has a mortgage loan that is a liability of the decedent’s estate, the debt may be charged against other property of the estate that is not subject to that mortgage.

If the decedent was personally liable for the mortgage, you must report the total property value in the Value column. Then enter the mortgage amount under “Description” on the Schedule. Deduct the unpaid principal amount of the mortgage loan separately under Schedule K.

If the estate is not liable for the mortgage, just report the property’s value less the debt in the value column as part of the gross estate. Do not report any amount less than zero. Also, do not deduct the amount of debt on Schedule K.

What about fractional interests?

In some situations, the executor can apply a fractional share discount. This is often the case for holdings under tenants in common. 

Valuation discounts can vary from 10% to 25%. The IRS has offered up plenty of guidance in the area of fractional discounts. 

Fractional interests can be very subjective and often raise the ire of the IRS. Make sure that your appraiser clearly documents any discounts, and you should attach a statement explaining the discount as an exhibit to the estate return. The appraiser must have adequate support for the discount if audited.

Form 706 Schedule A Example

Let’s look at a couple examples so you can see what a completed form looks like.

Example #1

Example #2

Schedule A-1: Section 2032A Valuation

Under this part of the Schedule, the executor can make an election to value certain farms and closely-held businesses. 

The goal of the estate is to reduce any estate tax liability. A such, the executor wants to reduce the value of the real estate as much as possible.

The appraiser values the real estate at market value. This is considered the highest and best use. But if you have a farm or specific types of real estate, you could possibly make an election to value the property at a reduced amount. This amount is based on the “special use” value.

Diving into section 2032A is beyond the scope of this article. But if you want to get additional information check out our post here.

How to Complete Form 706 Schedule A 

Just follow these five steps to complete the Schedule:

  1. Review all real estate holdings

    the first step is to review all estate assets and identify real estate assets that are included on Schedule A. Make sure you review the abovementioned section to identify similar assets that would be included on other schedules.

  2. Identify real estate that could be subject to a fractional discount or a special valuation

    If you have assets that are partially owned, you should consider including a fractional discount in the appraisal. Also, if you have farm land or a closely held business, consider a 2032A valuation.

  3. Obtain fair market value appraisals

    Engage a qualified appraiser to issue formal appraisals for all real estate. If you are considering selling some of the real estate, the final settlement statement will normally be used to represent fair market value.

  4. Coordinate with your CPA and estate attorney

    All asset values should be reviewed by your CPA and estate attorney. Make sure that proper documentation and exhibits are included with Form 706.

  5. Timely file form 706

    Remember that Form 706 must be filed within 9 months of the date of death. Don’t be late with the filing, but take advantage of an extension if you need to.

Takeaway

Schedule A is probably the most used Schedule on Form 706. But it does not need to be intimidating. But there are many different real estate types and different ways to structure ownership. That can make the process more confusing.

Hopefully, you now have a better understanding of how Schedule A works, and you can complete it yourself. Thanks to our example and sample language, you are off to a good start.

But make sure that if you have any issues, you contact a qualified CPA or tax attorney. The last thing you need is an audit. Form 706 is one of the most audited forms, and you don’t want to catch the attention of the IRS.

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