Special Use Valuation for Farmers

Preface: Proper estate planning can save tax dollars. Here’s a rule applicable for family farms.

Special Use Valuation for Farmers

A special rule (special use valuation) applicable to farmers may allow the next generation of a family to continue to operate a farm rather than sell it to meet estate tax obligations. Because fair market value considers the property’s value at its highest and best use, estate tax that is based on fair market value could make it prohibitive to continue to operate the farm as a family enterprise. For example, a farm may be worth $1 million to a developer to construct townhouses and a shopping mall, but only $400,000 to the farmer who wishes to continue operating it as a farm.

Under special use valuation, an executor may elect to value real property used in farming at a value based on its use as a farm, rather than at its fair market value. The election is irrevocable, and the reduction in value is limited to a ceiling amount depending on your year of death: $1.1 million for 2015; $1.11 million for 2016; and $1.12 million for 2017.

To elect special use valuation, the property must be put to a qualified use. That is, it must be used as a farm for farming purposes. Qualified woodlands may also qualify for special use valuation. It must also pass to qualified heirs. These include the decedent’s ancestor, spouse, lineal descendants of the decedent, his spouse or his parent, or the spouse of any lineal descendant. All property, including personal property, used in the farm must comprise 50 percent of the adjusted value of the gross estate and the real property used in the farm must comprise 25 percent of the adjusted value of the gross estate.

In addition, material participation in the operation of the farm for a total of at least five years in the eight years immediately preceding the decedent’s death, disability or retirement is required. If the qualified heir ceases to use the farm property or sells the property within ten years of the decedent’s death, an additional recapture tax is due.

If you would like to discuss how special use valuation might affect your estate planning, please contact your estate specialist.


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