How an estate elects special use valuation

Review qualification before preparing the election

Qualification involves the decedent’s citizenship or residency, qualifying United States farm or business real property, qualified heirs, estate composition, ownership, use and participation. Successive interests and indirect ownership require additional review.

The special use valuation eligibility guide covers those requirements and their exceptions in detail.

Complete the return, notice and attachments

The executor checks “Yes” on Form 706, Part III, line 2, and completes Schedule T with the required statements and appraisals. Part I identifies the election type, Part II is the notice, and Part III is the agreement.

The notice requires the following information:

• Property identification and a legal description.
• Fair market values, qualified use values and adjusted values.
• The valuation method and written appraisals.
• Ownership and participation information, including affidavits describing participation activities and identifying the participants.
• Recipient information.

On Schedule T, Part II, line 18, list every person receiving an interest in the specially valued property. For each person, report the total fair market value in column (e) and total special use value in column (f).

Those totals cover all specially valued property interests that the person receives. Attach additional copies of Part II, line 18, when needed.

Form 706 is generally due nine months after death. Once made, the election is irrevocable.

Gather signatures and designate the agent

Every living person with an interest in the designated property at the decedent’s death must join the agreement, whether the interest is present or future, vested or contingent.

Signers include remainder and executory interest holders, holders of general or special powers of appointment, default beneficiaries of those powers, and trustees holding property interests.

Other owners of undivided interests must also sign when the decedent held only a joint or undivided interest, or when only an undivided interest is specially valued.

Qualified heirs consent to personal liability for potential recapture tax. Other interest holders consent to collection of that additional estate tax from the qualified property.

A representative authorized under local law may sign for someone who uses an agent, lacks capacity or dies before the election.

Use Schedule T, Part IV, for additional names and signatures when Part III lacks space. Attach additional Part IV copies if necessary.

The agreement must designate an agent, provide satisfactory evidence of the agent’s authority to act for the parties, and give the agent’s address.

Use the protective election when final values are pending

A timely protective election preserves possible special use valuation pending final values, but qualification depends on those values meeting the statutory requirements. Initially report all property at fair market value.

File the protective notice with a timely estate tax return, identifying the decedent and taxpayer number, qualified use, and qualifying real and personal property passing to qualified heirs.

For Schedule T, enter the decedent’s name and Social Security number at the top and check the box in Part I. Complete Part II, line 1, and columns (a), (b) and (c) of lines 10 and 14.

Line 10 must list all real property passing to qualified heirs, including property later shown on line 6 with the additional notice.

Columns (d), (e) and (f) of lines 10 and 14, and other Schedule T entries, are unnecessary at this stage.

If final values establish qualification, file the additional notice and agreement with an amended estate tax return within 60 days after final determination. The protective election does not extend the time to pay taxes on the initial return.

Distinguish a correction opportunity from a late election

A timely election submitted with its agreement may receive a reasonable period to correct missing information or signatures, no longer than 90 days after notification.

If neither an election nor a protective election is timely made, special use valuation is unavailable. Filing relief does not itself establish payment relief.

Understand the agent’s continuing responsibilities

The IRS contacts the designated agent about continued qualification and the federal special lien. Acting for the parties with property interests, the agent must furnish requested information and notify the IRS of dispositions or cessation of qualified use.

The notification duty applies even when an event affects only part of the property.

The federal special lien arises when the election is filed. It attaches to property containing a qualified real property interest, in an amount equal to the adjusted tax difference attributable to that interest.

For each interest, the lien continues until the associated recapture tax liability is satisfied or becomes unenforceable through lapse of time, or the Secretary is satisfied that no further liability may arise.

Security may replace the lien to the extent regulations permit.

Review inherited basis separately

The inherited tax basis question covers how the election affects property acquired from the decedent and the limits on that treatment.

Two related terms

Special use valuation means valuing qualifying farm or other business real property under section 2032A based on its qualified use.

Material participation is a factual requirement involving participation in the farm or business. Passive income receipts, capital advances and review of plans or reports alone are insufficient.

An Investor Advantage perspective

This observation about specialist knowledge offers perspective for the conversation about an election’s requirements.

"But here's the problem and here's where becoming that specialist comes into play. There's always some barrier. There's always some restriction on how you can get money into this bucket."

Common questions