Special Use Valuation for Certain Real Estate in an Estate - IRC Section 2032A

Category: Estate and Inheritance Tax

An oft heard criticism of the estate tax is that it unfairly targets farmers and small business, where significant wealth may be being transferred to an heir, but in a form that is highly illiquid, thus giving rise to cries that "the kids have to sell the farm to pay the taxes."

As a caveat, with a little forethought, plans can be put into place to create liquidity at death. However, even for those who fail to plan, the IRC offers additional tax breaks through IRS Section 2032A, Special Use Valuation of Certain Farms and Real Estate, discussed here, and IRC Section, 6166, Installment Payments, a post for another day.

IRS Section 2032A allows qualified farm property to be valued at less then its fair market value if the following conditions apply:

IRC Section 2032A allows an alternate valuation for certain farm and closely held business real property. Real property may qualify for Section 2032A if:

1. Decedent was a US citizen or resident at the time of death;
2. The real property is located in the US;
3. At decedentÂ’s death, the real property was used by the decedent or a family member for farming or a trader business, or was rented by such use by either the surviving spouse for the lineal descendent of the decedent to a family member on a net cash basis;
4. The real property was acquired from or passed from a decedent to a qualified heir of the decedent;
5. The real property was owned and used in a qualified manner by the decedent or a member of the decedentÂ’s family during five (5) of the last eight (8) years before the decedentÂ’s death;
6. There was a material participation by the decedent or a member of the decedentÂ’s family during five (5) of the last eight (8) years before the decedentÂ’s death; and
7. The qualified property meets the certain percentage requirements:
a. At least fifty percent (50%) of the adjusted value of the gross estate must consist the adjusted value of the real or personal property that was being used as a farm or in a closely held business and that it was acquired, or passed from, the decedent to a qualified heir of the decedent; and
b. At least twenty-five percent (25%) of the adjusted value of the gross estate must consist of an adjusted value of the qualified farm or closely held business real property.

If you don't despair, IRC Section 6166 may take the sting out of the estate tax by allowing payments on the farm property to be deferred for up to 10 years under an installment payment plan.