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• The lineal descendant (child, stepchild, grandchild, etc.) of the individual, the individual's spouse, or a parent of the individual; or • The spouse or surviving spouse of any lineal descendant described above. Note. A legally adopted child of an individual is treated as a child of that individual by blood. Material Participation To elect special-use valuation, either the decedent or a member of the decedent’s family must have materially participated in the operation of the farm or other business for at least 5 of the 8 years ending on the date of the decedent's death. The existence of material participation is a factual determination. Passively collecting rents, salaries, draws, dividends, or other income from the farm or other business is not sufficient for material participation, nor is merely advancing capital and reviewing a crop plan and financial reports each season or business year. In determining whether the required participation has occurred, disregard brief periods (that is, 30 days or less) during which there was no material participation, as long as such periods were both preceded and followed by substantial periods (more than 120 days) during which there was uninterrupted material participation. Retirement or disability. If, on the date of death, the time period for material participation could not be met because the decedent was retired or disabled, a substitute period may apply. The decedent must have retired on social security or been disabled for a continuous period ending with death. A person is disabled for this purpose if the person was mentally or physically unable to materially participate in the operation of the farm or other business. The substitute time period for material participation for these decedents is a period totaling at least 5 years out of the 8-year period that ended on the earlier of: • The date the decedent began receiving social security benefits, or • The date the decedent became disabled. Surviving spouse. A surviving spouse who received qualified real property from the predeceased spouse is considered to have materially participated if the surviving spouse was engaged in the active management of the farm or other business. If the surviving spouse died within 8 years of the first spouse's death, you may add the period of material participation of the predeceased spouse to the period of active management by the surviving spouse to determine if the surviving spouse's estate qualifies for special-use valuation. To qualify for this, the property must have been eligible for special-use valuation in the predeceased spouse's estate, though it does not have to have been elected by that estate. For additional details regarding material participation, see Regulations section 20.2032A-3(e). Valuation Methods The primary method of valuing special-use property that is used for farming purposes is the annual gross cash rental method. If comparable gross cash rentals are not available, you can substitute comparable average annual net share rentals. If neither of these is available, or if you so elect, you can use the method for valuing real property in a closely held business. Average annual gross cash rental. Generally, the special-use value of property that is used for farming purposes is determined as follows. 1. Subtract the average annual state and local real estate taxes on actual tracts of comparable real property from the average annual gross cash rental for that same comparable property. 2. Divide the result in (1) by the average annual effective interest rate charged for all new federal land bank loans. See Effective interest rate, later. The computation of each average annual amount is based on the 5 most recent calendar years ending before the date of the decedent's death. Gross cash rental. Generally, gross cash rental is the total amount of cash received in a calendar year for the use of actual tracts of comparable farm real property in the same locality as the property being specially valued. You may not use: • Appraisals or other statements regarding rental value or areawide averages of rentals, • Rents paid wholly or partly in-kind, or • Property for which the amount of rent is based on production. The rental must have resulted from an arm's-length transaction and the amount of rent may not be reduced by the amount of any expenses or liabilities associated with the farm operation or the lease. Comparable property. Comparable property must be situated in the same locality as the qualified real property as determined by generally accepted real property valuation rules. The determination of comparability is based on a number of factors, none of which carries more weight than the others. It is often necessary to value land in segments where there are different uses or land characteristics included in the specially valued land. The following list contains some of the factors considered in determining comparability. • Similarity of soil. • Whether the crops grown would deplete the soil in a similar manner. • Types of soil conservation techniques that have been practiced on the two properties. • Whether the two properties are subject to flooding. • Slope of the land. • For livestock operations, the carrying capacity of the land. • For timbered land, whether the timber is comparable. • Whether the property as a whole is unified or segmented. If segmented, the availability of the means necessary for movement among the different sections. • Number, types, and conditions of all buildings and other fixed improvements located on the properties and their location as it affects efficient management, use, and value of the property. • Availability and type of transportation facilities in terms of costs and of proximity of the properties to local markets. You must specifically identify on the return the property being used as comparable property. Use the type of descriptions used to list real property on Schedule A. Effective interest rate. See Tables 1 and 2 of Rev. Rul. 2022-16, 2022-35 I.R.B. 171, available at Rev. Rul. 2022-16, Instructions for Form 706 (Rev. 09-2022) -13-