The Qualified Family-Owned Business Interest deduction is no longer available. Created as Internal Revenue Code Section 2057, it let an estate shield up to $675,000 of family business value from federal estate tax, but it applied only to estates of people who died before January 1, 2004, and Congress formally struck the section from the code in December 2014.1Justia Law. 26 USC 2057 – Repealed If you are trying to protect a family business from estate tax today, the tools you actually have are the much larger estate tax exemption, special-use valuation under Section 2032A, and the installment payment election under Section 6166.
What the Deduction Did While It Existed
Congress added Section 2057 through the Taxpayer Relief Act of 1997 to help families who inherited asset-rich, cash-poor businesses — farms, equipment-heavy operations, commercial real estate — that could not generate enough liquidity to pay estate tax without a forced sale. The provision subtracted up to $675,000 of qualifying family business value from the taxable estate. Paired with the then-current $625,000 estate tax exemption, it produced a combined shield of up to $1.3 million.2Office of the Law Revision Counsel. 26 USC 2057 – Family-Owned Business Interests
Eligibility was narrow. The business had to be closely held by one to three families, the family’s business interests had to exceed half of the adjusted gross estate, and the decedent or a family member had to have materially participated in the business for at least five of the eight years before death. Passive investments held inside the business did not count. Every heir had to sign a recapture agreement accepting personal liability if the tax savings were later clawed back, and the IRS could recapture the benefit for a full ten years after the death if an heir stopped participating, sold to an outsider, or moved the business out of the country.
Why It Was Repealed
The Economic Growth and Tax Relief Reconciliation Act of 2001 put Section 2057 on a glide path to disappearance. EGTRRA steadily raised the basic estate tax exemption, and once the exemption climbed into the millions, a separate deduction capped at $675,000 no longer did meaningful work relative to its complexity. The deduction stopped applying to estates of anyone dying after December 31, 2003,3Internal Revenue Service. IRM 5.5.8 Advisory Responsibilities for Processing Estate Tax Liens and Congress removed the section from the code in 2014.1Justia Law. 26 USC 2057 – Repealed
What Protects a Family Business from Estate Tax Now
The federal estate tax exemption for 2026 is $15 million per person following enactment of the One, Big, Beautiful Bill signed on July 4, 2025.4Internal Revenue Service. What’s New – Estate and Gift Tax A married couple can shelter up to $30 million using portability. For most family-owned businesses, that exemption alone eliminates the problem Section 2057 was written to solve.
Estates with business value above those thresholds — often large farms and commercial real estate holdings — still have exposure. Two provisions do the work QFOBI used to do, and they were the sources Section 2057 originally borrowed most of its rules from.
Section 2032A Special-Use Valuation
Section 2032A lets the executor value qualifying real property based on its actual current use rather than its highest-and-best-use market value. Farmland that could be sold for a housing development is valued as farmland. The reduction is capped and indexed for inflation; the cap is $1,420,000 for estates of decedents dying in 2025.5Internal Revenue Service. Revenue Procedure 2024-40 The 2026 figure follows the same inflation adjustment built into the statute.6Office of the Law Revision Counsel. 26 USC 2032A – Valuation of Certain Farm, Etc., Real Property
The requirements will feel familiar to anyone who researched QFOBI:
- At least 50 percent of the adjusted value of the gross estate must consist of real or personal property used in a qualified farm or business that passes to a qualified heir.
- At least 25 percent of the adjusted value must be qualified real property specifically.
- The decedent or a family member must have materially participated in the farm or business for at least five of the eight years before death.
- Every person with an interest in the property must sign a recapture agreement accepting potential recapture tax if the property is sold or converted to a non-qualifying use within ten years.
The election is made on Schedule T of Form 706, which is due nine months after the death, with a possible six-month extension.7Internal Revenue Service. Instructions for Form 706 – United States Estate (and Generation-Skipping Transfer) Tax Return Section 2032A applies only to real property used in a farm or active trade or business, not to passive investments or personal property.
Section 6166 Installment Payments
Section 6166 addresses the liquidity problem directly by letting the executor pay the estate tax attributable to a closely held business interest over time instead of all at once. The election is available when the value of the closely held business interest exceeds 35 percent of the adjusted gross estate.8Office of the Law Revision Counsel. 26 USC 6166 – Extension of Time for Payment of Estate Tax Where Estate Consists Largely of Interest in Closely Held Business
The executor can defer the first payment for up to five years after the normal due date and then pay the remaining tax in up to ten annual installments, stretching the total payment window to roughly 14 to 15 years. Interest accrues during that period, but a reduced rate applies to a portion of the deferred tax, which makes the cost more manageable than commercial borrowing.
A “closely held business” for Section 6166 purposes is a sole proprietorship, a partnership with 45 or fewer partners (or one in which the estate holds at least a 20 percent capital interest), or a corporation with 45 or fewer shareholders (or one in which the estate holds at least 20 percent of the voting stock).8Office of the Law Revision Counsel. 26 USC 6166 – Extension of Time for Payment of Estate Tax Where Estate Consists Largely of Interest in Closely Held Business Passive assets held by the business are excluded when the 35 percent threshold is calculated.
A Note on State Law
Some states wrote language mirroring Section 2057 into their own estate or inheritance tax systems, and those state-level provisions may have followed different timelines for repeal or modification. If you are relying on a state equivalent, confirm it remains in effect under current state law before planning around it. The federal deduction itself is gone and cannot be claimed on any return today.