More than 6,400 taxpayers filed an estate tax return (Form 706) in 2019, according to recently released IRS data—40.1% of which were taxable after various deductions were taken into account.
Form 706 disaggregates a decedent’s assets by type, which allows for analysis of the amount of real estate-related and small business assets on taxable returns. The IRS also publishes data by state which shows that effects are not only heterogeneous by size of estate but also by state of residence.
Real Estate and Small Business Assets
Taxable returns in 2019 included $12.2 billion of real estate and real estate-related assets, accounting for nearly one-sixth of the value of all assets. The three categories of real estate assets on Form 706 are personal residences, real estate partnerships, and other real estate.
The average value of personal residences on taxable returns was $1.6 million in 2019, but this value varied widely by estate size. For example, the average residence listed on returns with gross estate sizes under $10 million was $969,000, while the value averaged $3.6 million for estates of at least $50 million (Figure 1).
Figure 1
Real estate partnerships and other real estate accounted for 77.3% of real estate-related assets. Interest in real estate partnerships totaled $4.1 billion and averaged $7.0 million per taxable estate tax returns listing these assets. However, the line item only consists of general partnerships whose main function is the ownership of real estate assets; limited partnerships that own real estate are included in the “other limited partnerships” asset category (discussed below). As with personal residences, the average value of real estate partnership assets increases exponentially with estate size (Figure 2).
Figure 2
The “other real estate” line item on estate tax returns totaled $5.4 billion, or 44.2% of real estate-related assets. The category includes undeveloped land, real estate investment trusts (REITs), commercial property, and residential property other than one’s residence. Returns that included assets in this category averaged $2.6 million—61.4% less than the average amount of real estate partnerships. Again, the amount per return varies widely by the size of estate (Figure 3).
Figure 3
Small business assets on estate tax returns totaled $14.1 billion in 2019, accounting for 18.3% of the total value of taxable estates. Small business assets include those listed in the following categories: real estate partnerships, other limited partnership, farm assets, and other noncorporate business assets.
Estate Taxes Paid by State
The aggregate amount of federal estate tax paid by residents of states obviously varies by population size, but there is also a fairly wide distribution across states of average estate size and estate taxes paid.
Massachusetts taxpayers paid the most estate tax in the country, on average, with a typical net estate tax of $8.4 million. In contrast, Iowans paid the least–$1.5 million per taxable estate—on average. The IRS does not publish detailed data for 17 states and the District of Columbia for privacy purposes due to the small number of returns. Figure 4 lists the ten states with the largest average federal estate tax bills (of the 33 states for which data is available.
Figure 4
The effective estate tax rate also varies by state. Massachusetts taxpayers not only pay the most federal estate tax, on average, but also pay the highest effective rate at 13.8%. Kansas estates pay the lowest effective rate (3.2%).
The list of states in which taxpayers pay the ten highest effective rates looks similar to the top ten list above in terms of composition (Figure 5). Wyoming, Florida, and Colorado are replaced by Missouri, Indiana, and South Carolina in the top ten states. However, the order is largely different as New Jersey moves from second to tenth and Pennsylvania falls from fifth to ninth.
Figure 5
Sixteen states and the District of Columbia impose a “death tax” at the state-level. Taxpayers in CT, IL, MA, ME, MN, NY, OR, RI, VT, WA, and DC pay an estate tax, where the tax owed is based on the size of a decedent’s estate. Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania levy inheritance taxes based on a taxpayer’s relationship to the decedent and the amount inherited. Maryland imposes both types of tax.