Page 9

mortgage or indebtedness) is included passed from the decedent if one of the unable to materially participate in the in the value of the gross estate. The following applies: operation of the farm or other business. adjusted value of the qualified real and • The property is considered to have The substitute time period for personal property used in different been acquired from or to have passed material participation for these businesses may be combined to meet from the decedent under section decedents is a period totaling at least 5 the 50% and 25% requirements. 1014(b) (relating to basis of property years out of the 8-year period that acquired from a decedent); ended on the earlier of: Qualified Real Property • The property is acquired by any • The date the decedent began person from the estate; or Qualified use. Qualified use means receiving social security benefits or • The property is acquired by any the use of the property as a farm for • The date the decedent became person from a trust, to the extent the farming purposes or the use of property disabled. property is includible in the gross in a trade or business other than Surviving spouse. A surviving estate. farming. Trade or business applies only spouse who received qualified real to the active conduct of a business. It Qualified heir. A person is a qualified property from the predeceased spouse does not apply to passive investment heir of property if he or she is a is considered to have materially activities or the mere passive rental of member of the decedent’s family and participated if he or she was engaged property to a person other than a acquired or received the property from in the active management of the farm member of the decedent’s family. Also, the decedent. If a qualified heir or other business. If the surviving no trade or business is present in the disposes of any interest in qualified real spouse died within 8 years of the first case of activities not engaged in for property to any member of his or her spouse’s death, you may add the profit. family, that person will then be treated period of material participation of the Ownership. To qualify as special-use as the qualified heir for that interest. predeceased spouse to the period of property, the decedent or a member of active management by the surviving The term “member of the family” the decedent’s family must have owned spouse to determine if the surviving includes only: and used the property in a qualified use spouse’s estate qualifies for special-use • An ancestor (parent, grandparent, for 5 of the last 8 years before the valuation. To qualify for this, the etc.) of the individual; decedent’s death. Ownership may be property must have been eligible for • The spouse of the individual; direct or indirect through a corporation, special-use valuation in the • The lineal descendant (child, a partnership, or a trust. predeceased spouse’s estate, though it stepchild, grandchild, etc.) of the If the ownership is indirect, the does not have to have been elected by individual, the individual’s spouse, or a business must qualify as a closely held that estate. parent of the individual; or business under section 6166. The • The spouse, widow, or widower of For additional details regarding ownership, when combined with any lineal descendant described above. material participation, see Regulations periods of direct ownership, must meet A legally adopted child of an individual section 20.2032A-3(e). the requirements of section 6166 on the is treated as a child of that individual by date of the decedent’s death and for a Valuation Methods blood. period of time that equals at least 5 of The primary method of valuing the 8 years preceding death. Material Participation special-use value property that is used If the property was leased by the To elect special-use valuation, either for farming purposes is the annual decedent to a closely held business, it the decedent or a member of his or her gross cash rental method. If qualifies as long as the business entity family must have materially participated comparable gross cash rentals are not to which it was rented was a closely in the operation of the farm or other available, you can substitute held business for the decedent on the business for at least 5 of the 8 years comparable average annual net share date of the decedent’s death and for ending on the date of the decedent’s rentals. If neither of these are available, sufficient time to meet the “5 in 8 years” death. The existence of material or if you so elect, you can use the test explained above. participation is a factual determination, method for valuing real property in a but passively collecting rents, salaries, closely held business. Structures and other real property draws, dividends, or other income from improvements. Qualified real Average annual gross cash rental. the farm or other business does not property includes residential buildings Generally, the special-use value of constitute material participation. Neither and other structures and real property property that is used for farming does merely advancing capital and improvements regularly occupied or purposes is determined as follows: reviewing a crop plan and financial used by the owner or lessee of real 1. Subtract the average annual reports each season or business year. property (or by the employees of the state and local real estate taxes on owner or lessee) to operate the farm or In determining whether the required actual tracts of comparable real business. A farm residence which the participation has occurred, disregard property from the average annual gross decedent had occupied is considered to brief periods (that is, 30 days or less) cash rental for that same comparable have been occupied for the purpose of during which there was no material property and operating the farm even when a family participation, as long as such periods 2. Divide the result in (1) by the member and not the decedent was the were both preceded and followed by average annual effective interest rate person materially participating in the substantial periods (more than 120 charged for all new Federal Land Bank operation of the farm. days) during which there was loans. Qualified real property also includes uninterrupted material participation. roads, buildings, and other structures The computation of each average Retirement or disability. If, on the and improvements functionally related annual amount is based on the 5 most date of death, the time period for to the qualified use. recent calendar years ending before the material participation could not be met date of the decedent’s death. See Elements of value such as mineral because the decedent had retired or Effective interest rate below. rights that are not related to the farm or was disabled, a substitute period may business use are not eligible for apply. The decedent must have retired Gross cash rental. Generally, special-use valuation. on social security or been disabled for a gross cash rental is the total amount of Property acquired from the continuous period ending with death. A cash received in a calendar year for the decedent. Property is considered to person is disabled for this purpose if he use of actual tracts of comparable farm have been acquired from or to have or she was mentally or physically real property in the same locality as the -9- Part Instructions