26 USC 2032A - Valuation of certain farm, etc., real property

U.S Code last checked for updates: Nov 22, 2024

§ 2032A.

Valuation of certain farm, etc., real property

(a)

Value based on use under which property qualifies

(1)

General rule

If—

(A)

the decedent was (at the time of his death) a citizen or resident of the United States, and

(B)

the executor elects the application of this section and files the agreement referred to in subsection (d)(2),

then, for purposes of this chapter, the value of qualified real property shall be its value for the use under which it qualifies, under subsection (b), as qualified real property.

(2)

Limitation on aggregate reduction in fair market value

(3)

Inflation adjustment

In the case of estates of decedents dying in a calendar year after 1998, the $750,000 amount contained in paragraph (2) shall be increased by an amount equal to—

(A)

$750,000, multiplied by

(B)

the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting “calendar year 1997” for “calendar year 2016” in subparagraph (A)(ii) thereof.

If any amount as adjusted under the preceding sentence is not a multiple of $10,000, such amount shall be rounded to the next lowest multiple of $10,000.

(b)

Qualified real property

(1)

In general

For purposes of this section, the term “qualified real property” means real property located in the United States which was acquired from or passed from the decedent to a qualified heir of the decedent and which, on the date of the decedent’s death, was being used for a qualified use by the decedent or a member of the decedent’s family, but only if—

(A)

50 percent or more of the adjusted value of the gross estate consists of the adjusted value of real or personal property which—

(i)

on the date of the decedent’s death, was being used for a qualified use by the decedent or a member of the decedent’s family, and

(ii)

was acquired from or passed from the decedent to a qualified heir of the decedent.

(B)

25 percent or more of the adjusted value of the gross estate consists of the adjusted value of real property which meets the requirements of subparagraphs (A)(ii) and (C),

(C)

during the 8-year period ending on the date of the decedent’s death there have been periods aggregating 5 years or more during which—

(i)

such real property was owned by the decedent or a member of the decedent’s family and used for a qualified use by the decedent or a member of the decedent’s family, and

(ii)

there was material participation by the decedent or a member of the decedent’s family in the operation of the farm or other business, and

(D)

such real property is designated in the agreement referred to in subsection (d)(2).

(2)

Qualified use

For purposes of this section, the term “qualified use” means the devotion of the property to any of the following:

(A)

use as a farm for farming purposes, or

(B)

use in a trade or business other than the trade or business of farming.

(3)

Adjusted value

For purposes of paragraph (1), the term “adjusted value” means—

(A)

in the case of the gross estate, the value of the gross estate for purposes of this chapter (determined without regard to this section), reduced by any amounts allowable as a deduction under paragraph (4) of section 2053(a), or

(B)

in the case of any real or personal property, the value of such property for purposes of this chapter (determined without regard to this section), reduced by any amounts allowable as a deduction in respect of such property under paragraph (4) of section 2053(a).

(4)

Decedents who are retired or disabled

(A)

In general

If, on the date of the decedent’s death, the requirements of paragraph (1)(C)(ii) with respect to the decedent for any property are not met, and the decedent—

(i)

was receiving old-age benefits under title II of the Social Security Act for a continuous period ending on such date, or

(ii)

was disabled for a continuous period ending on such date,

then paragraph (1)(C)(ii) shall be applied with respect to such property by substituting “the date on which the longer of such continuous periods began” for “the date of the decedent’s death” in paragraph (1)(C).

(B)

Disabled defined

(C)

Coordination with recapture

(5)

Special rules for surviving spouses

(A)

In general

(B)

Special rule

(C)

Coordination with paragraph (4)

(c)

Tax treatment of dispositions and failures to use for qualified use

(1)

Imposition of additional estate tax

If, within 10 years after the decedent’s death and before the death of the qualified heir—

(A)

the qualified heir disposes of any interest in qualified real property (other than by a disposition to a member of his family), or

(B)

the qualified heir ceases to use for the qualified use the qualified real property which was acquired (or passed) from the decedent,

then, there is hereby imposed an additional estate tax.

(2)

Amount of additional tax

(A)

In general

The amount of the additional tax imposed by paragraph (1) with respect to any interest shall be the amount equal to the lesser of—

(i)

the adjusted tax difference attributable to such interest, or

(ii)

the excess of the amount realized with respect to the interest (or, in any case other than a sale or exchange at arm’s length, the fair market value of the interest) over the value of the interest determined under subsection (a).

(B)

Adjusted tax difference attributable to interest

For purposes of subparagraph (A), the adjusted tax difference attributable to an interest is the amount which bears the same ratio to the adjusted tax difference with respect to the estate (determined under subparagraph (C)) as—

(i)

the excess of the value of such interest for purposes of this chapter (determined without regard to subsection (a)) over the value of such interest determined under subsection (a), bears to

(ii)

a similar excess determined for all qualified real property.

(C)

Adjusted tax difference with respect to the estate

(D)

Partial dispositions

For purposes of this paragraph, where the qualified heir disposes of a portion of the interest acquired by (or passing to) such heir (or a predecessor qualified heir) or there is a cessation of use of such a portion—

(i)

the value determined under subsection (a) taken into account under subparagraph (A)(ii) with respect to such portion shall be its pro rata share of such value of such interest, and

(ii)

the adjusted tax difference attributable to the interest taken into account with respect to the transaction involving the second or any succeeding portion shall be reduced by the amount of the tax imposed by this subsection with respect to all prior transactions involving portions of such interest.

(E)

Special rule for disposition of timber

In the case of qualified woodland to which an election under subsection (e)(13)(A) applies, if the qualified heir disposes of (or severs) any standing timber on such qualified woodland—

(i)

such disposition (or severance) shall be treated as a disposition of a portion of the interest of the qualified heir in such property, and

(ii)

the amount of the additional tax imposed by paragraph (1) with respect to such disposition shall be an amount equal to the lesser of—

(I)

the amount realized on such disposition (or, in any case other than a sale or exchange at arm’s length, the fair market value of the portion of the interest disposed or severed), or

(II)

the amount of additional tax determined under this paragraph (without regard to this subparagraph) if the entire interest of the qualified heir in the qualified woodland had been disposed of, less the sum of the amount of the additional tax imposed with respect to all prior transactions involving such woodland to which this subparagraph applied.

For purposes of the preceding sentence, the disposition of a right to sever shall be treated as the disposition of the standing timber. The amount of additional tax imposed under paragraph (1) in any case in which a qualified heir disposes of his entire interest in the qualified woodland shall be reduced by any amount determined under this subparagraph with respect to such woodland.

(3)

Only 1 additional tax imposed with respect to any 1 portion

(4)

Due date

(5)

Liability for tax; furnishing of bond

(6)

Cessation of qualified use

For purposes of paragraph (1)(B), real property shall cease to be used for the qualified use if—

(A)

such property ceases to be used for the qualified use set forth in subparagraph (A) or (B) of subsection (b)(2) under which the property qualified under subsection (b), or

(B)

during any period of 8 years ending after the date of the decedent’s death and before the date of the death of the qualified heir, there had been periods aggregating more than 3 years during which—

(i)

in the case of periods during which the property was held by the decedent, there was no material participation by the decedent or any member of his family in the operation of the farm or other business, and

(ii)

in the case of periods during which the property was held by any qualified heir, there was no material participation by such qualified heir or any member of his family in the operation of the farm or other business.

(7)

Special rules

(A)

No tax if use begins within 2 years

If the date on which the qualified heir begins to use the qualified real property (hereinafter in this subparagraph referred to as the commencement date) is before the date 2 years after the decedent’s death—

(i)

no tax shall be imposed under paragraph (1) by reason of the failure by the qualified heir to so use such property before the commencement date, and

(ii)

the 10-year period under paragraph (1) shall be extended by the period after the decedent’s death and before the commencement date.

(B)

Active management by eligible qualified heir treated as material participation

For purposes of paragraph (6)(B)(ii), the active management of a farm or other business by—

(i)

an eligible qualified heir, or

(ii)

a fiduciary of an eligible qualified heir described in clause (ii) or (iii) of subparagraph (C),

shall be treated as material participation by such eligible qualified heir in the operation of such farm or business. In the case of an eligible qualified heir described in clause (ii), (iii), or (iv) of subparagraph (C), the preceding sentence shall apply only during periods during which such heir meets the requirements of such clause.

(C)

Eligible qualified heir

For purposes of this paragraph, the term “eligible qualified heir” means a qualified heir who—

(i)

is the surviving spouse of the decedent,

(ii)

has not attained the age of 21,

(iii)

is disabled (within the meaning of subsection (b)(4)(B)), or

(iv)

is a student.

(D)

Student

(E)

Certain rents treated as qualified use

(8)

Qualified conservation contribution is not a disposition

(d)

Election; agreement

(1)

Election

(2)

Agreement

(3)

Modification of election and agreement to be permitted

The Secretary shall prescribe procedures which provide that in any case in which the executor makes an election under paragraph (1) (and submits the agreement referred to in paragraph (2)) within the time prescribed therefor, but—

(A)

the notice of election, as filed, does not contain all required information, or

(B)

signatures of 1 or more persons required to enter into the agreement described in paragraph (2) are not included on the agreement as filed, or the agreement does not contain all required information,

the executor will have a reasonable period of time (not exceeding 90 days) after notification of such failures to provide such information or signatures.

(e)

Definitions; special rules

For purposes of this section—

(1)

Qualified heir

(2)

Member of family

The term “member of the family” means, with respect to any individual, only—

(A)

an ancestor of such individual,

(B)

the spouse of such individual,

(C)

a lineal descendant of such individual, of such individual’s spouse, or of a parent of such individual, or

(D)

the spouse of any lineal descendant described in subparagraph (C).

For purposes of the preceding sentence, a legally adopted child of an individual shall be treated as the child of such individual by blood.

(3)

Certain real property included

(4)

Farm

(5)

Farming purposes

The term “farming purposes” means—

(A)

cultivating the soil or raising or harvesting any agricultural or horticultural commodity (including the raising, shearing, feeding, caring for, training, and management of animals) on a farm;

(B)

handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant, or operator of the farm regularly produces more than one-half of the commodity so treated; and

(C)

(i)

the planting, cultivating, caring for, or cutting of trees, or

(ii)

the preparation (other than milling) of trees for market.

(6)

Material participation

(7)

Method of valuing farms

(A)

In general

Except as provided in subparagraph (B), the value of a farm for farming purposes shall be determined by dividing—

(i)

the excess of the average annual gross cash rental for comparable land used for farming purposes and located in the locality of such farm over the average annual State and local real estate taxes for such comparable land, by

(ii)

the average annual effective interest rate for all new Federal Land Bank loans.

For purposes of the preceding sentence, each average annual computation shall be made on the basis of the 5 most recent calendar years ending before the date of the decedent’s death.

(B)

Value based on net share rental in certain cases

(i)

In general

(ii)

Net share rental

For purposes of this paragraph, the term “net share rental” means the excess of—

(I)

the value of the produce received by the lessor of the land on which such produce is grown, over

(II)

the cash operating expenses of growing such produce which, under the lease, are paid by the lessor.

(C)

Exception

The formula provided by subparagraph (A) shall not be used—

(i)

where it is established that there is no comparable land from which the average annual gross cash rental may be determined, or

(ii)

where the executor elects to have the value of the farm for farming purposes determined and that there is no comparable land from which the average net share rental may be determined under paragraph (8).

(8)

Method of valuing closely held business interests, etc.

In any case to which paragraph (7)(A) does not apply, the following factors shall apply in determining the value of any qualified real property:

(A)

The capitalization of income which the property can be expected to yield for farming or closely held business purposes over a reasonable period of time under prudent management using traditional cropping patterns for the area, taking into account soil capacity, terrain configuration, and similar factors,

(B)

The capitalization of the fair rental value of the land for farm land or closely held business purposes,

(C)

Assessed land values in a State which provides a differential or use value assessment law for farmland or closely held business,

(D)

Comparable sales of other farm or closely held business land in the same geographical area far enough removed from a metropolitan or resort area so that nonagricultural use is not a significant factor in the sales price, and

(E)

Any other factor which fairly values the farm or closely held business value of the property.

(9)

Property acquired from decedent

Property shall be considered to have been acquired from or to have passed from the decedent if—

(A)

such property is so considered under section 1014(b) (relating to basis of property acquired from a decedent),

(B)

such property is acquired by any person from the estate, or

(C)

such property is acquired by any person from a trust (to the extent such property is includible in the gross estate of the decedent).

(10)

Community property

(11)

Bond in lieu of personal liability

(12)

Active management

(13)

Special rules for woodlands

(A)

In general

(B)

Qualified woodland

The term “qualified woodland” means any real property which—

(i)

is used in timber operations, and

(ii)

is an identifiable area of land such as an acre or other area for which records are normally maintained in conducting timber operations.

(C)

Timber operations

The term “timber operations” means—

(i)

the planting, cultivating, caring for, or cutting of trees, or

(ii)

the preparation (other than milling) of trees for market.

(D)

Election

(14)

Treatment of replacement property acquired in section 1031 or 1033 transactions

(A)

In general

(B)

Limitation

(C)

Definitions

For purposes of this paragraph—

(i)

Qualified replacement property

The term “qualified replacement property” means any real property which is—

(I)

acquired in an exchange which qualifies under section 1031, or

(II)

the acquisition of which results in the nonrecognition of gain under section 1033.

Such term shall only include property which is used for the same qualified use as the replaced property was being used before the exchange.

(ii)

Replaced property

The term “replaced property” means—

(I)

the property transferred in the exchange which qualifies under section 1031, or

(II)

the property compulsorily or involuntarily converted (within the meaning of section 1033).

(f)

Statute of limitations

If qualified real property is disposed of or ceases to be used for a qualified use, then—

(1)

the statutory period for the assessment of any additional tax under subsection (c) attributable to such disposition or cessation shall not expire before the expiration of 3 years from the date the Secretary is notified (in such manner as the Secretary may by regulations prescribe) of such disposition or cessation (or if later in the case of an involuntary conversion or exchange to which subsection (h) or (i) applies, 3 years from the date the Secretary is notified of the replacement of the converted property or of an intention not to replace or of the exchange of property), and

(2)

such additional tax may be assessed before the expiration of such 3-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.

(g)

Application of this section and section 6324B to interests in partnerships, corporations, and trusts

(h)

Special rules for involuntary conversions of qualified real property

(1)

Treatment of converted property

(A)

In general

If there is an involuntary conversion of an interest in qualified real property—

(i)

no tax shall be imposed by subsection (c) on such conversion if the cost of the qualified replacement property equals or exceeds the amount realized on such conversion, or

(ii)

if clause (i) does not apply, the amount of the tax imposed by subsection (c) on such conversion shall be the amount determined under subparagraph (B).

(B)

Amount of tax where there is not complete reinvestment

The amount determined under this subparagraph with respect to any involuntary conversion is the amount of the tax which (but for this subsection) would have been imposed on such conversion reduced by an amount which—

(i)

bears the same ratio to such tax, as

(ii)

the cost of the qualified replacement property bears to the amount realized on the conversion.

(2)

Treatment of replacement property

For purposes of subsection (c)—

(A)

any qualified replacement property shall be treated in the same manner as if it were a portion of the interest in qualified real property which was involuntarily converted; except that with respect to such qualified replacement property the 10-year period under paragraph (1) of subsection (c) shall be extended by any period, beyond the 2-year period referred to in section 1033(a)(2)(B)(i), during which the qualified heir was allowed to replace the qualified real property,

(B)

any tax imposed by subsection (c) on the involuntary conversion shall be treated as a tax imposed on a partial disposition, and

(C)

paragraph (6) of subsection (c) shall be applied—

(i)

by not taking into account periods after the involuntary conversion and before the acquisition of the qualified replacement property, and

(ii)

by treating material participation with respect to the converted property as material participation with respect to the qualified replacement property.

(3)

Definitions and special rules

For purposes of this subsection—

(A)

Involuntary conversion

(B)

Qualified replacement property

The term “qualified replacement property” means—

(i)

in the case of an involuntary conversion described in section 1033(a)(1), any real property into which the qualified real property is converted, or

(ii)

in the case of an involuntary conversion described in section 1033(a)(2), any real property purchased by the qualified heir during the period specified in section 1033(a)(2)(B) for purposes of replacing the qualified real property.

Such term only includes property which is to be used for the qualified use set forth in subparagraph (A) or (B) of subsection (b)(2) under which the qualified real property qualified under subsection (a).

(4)

Certain rules made applicable

(i)

Exchanges of qualified real property

(1)

Treatment of property exchanged

(A)

Exchanges solely for qualified exchange property

(B)

Exchanges where other property received

If an interest in qualified real property is exchanged for an interest in qualified exchange property and other property in a transaction which qualifies under section 1031, the amount of the tax imposed by subsection (c) by reason of such exchange shall be the amount of tax which (but for this subparagraph) would have been imposed on such exchange under subsection (c)(1), reduced by an amount which—

(i)

bears the same ratio to such tax, as

(ii)

the fair market value of the qualified exchange property bears to the fair market value of the qualified real property exchanged.

For purposes of clause (ii) of the preceding sentence, fair market value shall be determined as of the time of the exchange.

(2)

Treatment of qualified exchange property

For purposes of subsection (c)—

(A)

any interest in qualified exchange property shall be treated in the same manner as if it were a portion of the interest in qualified real property which was exchanged,

(B)

any tax imposed by subsection (c) by reason of the exchange shall be treated as a tax imposed on a partial disposition, and

(C)

paragraph (6) of subsection (c) shall be applied by treating material participation with respect to the exchanged property as material participation with respect to the qualified exchange property.

(3)

Qualified exchange property

(Added Pub. L. 94–455, title XX, § 2003(a), Oct. 4, 1976, 90 Stat. 1856; amended Pub. L. 95–472, § 4(a), (c), Oct. 17, 1978, 92 Stat. 1334, 1336; Pub. L. 95–600, title VII, § 702(d)(1), (2), (4), (5), Nov. 6, 1978, 92 Stat. 2928, 2929; Pub. L. 97–34, title IV, § 421(a)–(d)(2)(A), (e), (f), (h)–(j)(2)(A), (3), (4), Aug. 13, 1981, 95 Stat. 306–313; Pub. L. 97–448, title I, § 104(b)(1), (2), Jan. 12, 1983, 96 Stat. 2381; Pub. L. 98–369, div. A, title X, § 1025(a), July 18, 1984, 98 Stat. 1030; Pub. L. 99–514, title I, § 104(b)(3), Oct. 22, 1986, 100 Stat. 2105; Pub. L. 100–647, title VI, § 6151(a), Nov. 10, 1988, 102 Stat. 3724; Pub. L. 101–508, title XI, § 11802(f)(5), Nov. 5, 1990, 104 Stat. 1388–530; Pub. L. 105–34, title V, §§ 501(b), 504(a), (b), 508(c), title XIII, § 1313(a), Aug. 5, 1997, 111 Stat. 845, 853, 854, 860, 1045; Pub. L. 108–311, title II, § 207(22), Oct. 4, 2004, 118 Stat. 1178; Pub. L. 115–97, title I, § 11002(d)(1)(DD), Dec. 22, 2017, 131 Stat. 2060.)

cite as: 26 USC 2032A