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Estate Tax Special Use Valuation for Farmland Part 1

by Beth Flowers, Associate

When an individual dies, the family of that individual often has concerns about the amount of estate (inheritance) tax that will be owed. That is especially true when a majority of an individual’s assets include farmland. The Internal Revenue Code (IRC) contains a special section (IRC §2032A) for valuation of farm property based upon its production capacity rather than fair market value, as a means of allowing farm families to pass such property to the next generation without being forced to sell the property to pay estatetax. This is known as Special Use Valuation. A Special Use Valuation election must be made on a timely filed Estate Tax Return (Federal Form 706).

However, in order to qualify for Special Use Valuation, there are a number of specific requirements that must be met in order for an estate to use IRC §2032A to value farm property.  First, at least 25% or more of the decedent’s gross estate must consist of real property used in the farming business and at least 50% of the decedent’s gross estate must consist of real or personal property (such as farm equipment) used in the farming business.

Second, the property to be valued under IRC §2032A must have been used in a qualifying manner by the decedent or a member of the decedent’s family for at least five of the eight years prior to the decedent’s death and must have been so used up to the date of the decedent’s death.  Next, IRC §2032A requires that the property must pass to a qualified heir, defined as a member of the decedent’s family

Finally, in order to take full advantage of IRC §2032A, in addition to meeting all of the above requirements prior to a decedent’s death, the decedent’s qualified heirs must continue to materially participate in the qualified use for ten years following the decedent’s death.  If for any reason the property is sold or the qualified use ceases within that ten-year period following the decedent’s death, the qualified heir will be subject to an additional estate tax. Essentially the “recapture” tax acts to treat the property as if it had been included at its full value on the original estate tax return.

For additional information regarding the Estate Tax Special Use Valuation for Farmland, contact the Belleville office of Mathis, Marifian & Richter, LTD.

Professional Services Disclaimer: Please note that the information presented here is as an educational service, and while it contains information about legal issues, it is not legal advice. No warranty is made regarding the applicability of the information presented to a particular client situation, and the information set forth is not a substitute for original legal research, analysis and drafting for a particular client situation.

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