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The Code Section 2032A special use valuation rules allow a reduction of up to $750,000 (adjusted for inflation) in the value of real property (land and buildings) used in a family owned farm or other family business that is closely held. The inflation-adjusted reduction amount is $1,020,000 for estates of decedents dying in calendar year 2011.
As a primary matter, the property must satisfy the following threshold tests before it will qualify for special use valuation under Code Section 2032A:
- The decedent, at the time of his death, must have been a U.S. citizen or resident, Code Section 2032A(a)(1)(A);
- the real property for which the special use valuation is sought must be located within the United States and held by decedent or by a closely-held family business in which decedent had an interest;
- the real estate must pass to one of the decedent’s qualified heirs (surviving spouse or family members – under a broad definition of family), Code Section 2032A(e)(1)-(2);
- the decedent must have been using the property for “special use” purposes (farming or any other trade or business) at the time of death, or must fit within one of the exceptions for a retired or disabled person who, at the time the retirement or disability began, was using the property for the special use purposes – in which case the special use must have been taken over by a family member, Code Section 2032A(b)(1)-(2);
- the special use must have occurred for five out of the eight years preceding death (or retirement or disability); however, the five-year period need not have been continuous, Code Section 2032A(b)(1)(C);
- under Code Section 2032A(b)(1)(A), the value of special use real and personal property must total 50 percent or more of the value of decedent’s gross estate (with both the property and the estate adjusted for unpaid mortgages or similar indebtedness as provided in Code Section 2053(a)(4)); and
- under Code Section 2032A(b)(1)(B), the value of special use real estate must total 25 percent or more of the value of decedent’s gross estate (with both the real property and estate adjusted for unpaid mortgages or similar indebtedness as provided by Code Section 2053(a)(4)).
If these requirements are met, the executor is allowed to elect special use valuation of the land and buildings used in the family business
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