IRC 2032A: Special Use Valuation for Farm and Real Property

Internal Revenue Code Section 2032A offers a tax benefit for family-owned farms and real property by allowing them to be valued based on their current use rather than potential market value. This provision reduces estate taxes, helping families preserve generational assets without excessive financial burdens.

Election Criteria

To qualify for special use valuation under IRC 2032A, the decedent must have been a U.S. citizen or resident at the time of death. The property must have been used for a qualified purpose, such as farming or operating a closely-held business, for at least five of the eight years preceding the decedent’s death. This ensures the provision supports ongoing operations rather than speculative investments.

In addition, the decedent or a family member must have materially participated in the operation of the farm or business during the same five-year period. Material participation involves active involvement in management and decision-making processes, ensuring the property’s role in the family’s livelihood.

Types of Qualified Real Property

Qualified real property under IRC 2032A includes agricultural property, ranches, and timberland. Farmlands, along with associated buildings like barns and silos, are eligible. Ranches used for grazing livestock are also included, supporting local economies and preserving cultural heritage.

Timberland qualifies as well, allowing families in the forestry industry to benefit from valuation based on current use instead of development potential. This is particularly beneficial for properties that require long-term investment, such as timber production.

Special Use Valuation

Under IRC 2032A, special use valuation allows real property to be assessed based on its actual use rather than its highest and best use, lowering estate tax burdens. This enables families to continue operations without needing to sell assets to cover tax liabilities.

To apply this valuation, the estate must determine the property’s current use value, often through agricultural appraisers who assess factors like soil quality and crop yield potential. The difference between this value and the fair market value can result in significant tax savings. For example, farmland valued at $3,000 per acre for agricultural use versus $10,000 per acre for development can lead to substantial reductions in estate taxes.

The IRS imposes a cap on the reduction in value. As of 2024, the maximum allowable reduction is $1.31 million, adjusted annually for inflation. Understanding this limit is essential for maximizing the benefit while staying within compliance.

Compliance Requirements

To comply with IRC 2032A, the election must be filed on a timely estate tax return, including extensions. Missing this deadline forfeits the benefit, making timely filing a critical step. The election also requires a written agreement signed by all interested parties, consenting to personal liability for any potential recapture tax.

Supporting documentation is crucial. Estates must provide evidence of the property’s special use valuation, such as appraisals and operational records. For agricultural properties, this might include crop production records or livestock inventories. The IRS may review these documents to ensure compliance with the election criteria.

Recapture Provisions

Recapture provisions prevent misuse of IRC 2032A benefits. If the property ceases to be used for its qualified purpose within 10 years of the decedent’s death, the IRS imposes a recapture tax. This applies if the property is sold or its use changes during this period.

The recapture tax is calculated as the difference between the estate tax savings and the tax that would have been owed if the property had been valued at full market value. For instance, if an estate saved $500,000 in taxes and the property is later sold for development within the recapture period, the IRS can reclaim this amount. If the change occurs partway through the 10 years, the tax is prorated.

To avoid recapture, families must document the continued qualified use of the property, maintaining operational records and ensuring ownership remains with family members who will uphold the intended use. Proper estate planning, including trusts or family partnerships, can help reduce the risk of recapture by preserving the property’s purpose.