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Question: My client owns a working farm, which is also a prime parcel of real estate for residential development. How would the farm be valued for federal estate tax purposes?
Answer: Most assets are valued at their fair market value, which means that it’s the price a willing buyer would pay a willing seller.
Section 2032A of the Revenue Code provides that the administrator of an estate can elect a special use valuation for a farm under certain circumstance. That means the land can be valued as a working farm—often yielding a low value—rather than as a potential parcel for development, which would produce a higher value for estate tax purposes.
Here are the requirements for making the Section 2032A election:
1. On the date of the decedent’s death, the property must be in use as a farm or in a trade or business other than farming.
2. The net value of the property must equal at least 50% of the decedent’s gross estate.
3. At least 25% of the gross estate (less debts and unpaid mortgages on all property in the gross estate) must be qualified farm or closely held business real property.
4. The property must pass to a member of the decedent’s immediate family.
5. The real property must have been owned by the decedent or a member of his family and used as a farm or in a closely held business for an aggregate of five years or more of the eight year period ending on the date of the decedent’s death.
The maximum reduction of the decedent’s gross estate under this provision is $1,000,000, indexed for inflation. The indexed amount for 2011 is $1,020,000.
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