How does special-use valuation affect inherited land's tax basis?
Key takeaway
Special-use valuation can leave an heir without a step-up in income tax basis. Under section 2032A an executor may elect to value qualified farm or business real property at its qualified-use value instead of fair market value. Practitioners describe the election as reducing the property's income tax basis, which can mean capital gains tax when land is later sold.
What the election does to the estate tax value
Under section 2032A, an executor may elect to value qualified real property used as a farm or in another trade or business at its qualified-use value. The alternative is fair market value.
The provision lets an estate value qualifying farmland at its agricultural-use value instead of fair market value. Conditions apply to the election.
What practitioners describe about basis
Practitioners say that once the election is made, the income tax basis of the real property is reduced. They also name technical requirements and later estate tax recapture as concerns with section 2032A.
Practitioners describe the heir's concern as the lack of a step-up in basis, which can mean significant capital gains tax if land or other assets are sold.
Basis in other transfers for comparison
Estate planning practitioners describe gifted property as carrying over the donor's income tax basis, without a step-up at the grantor's death.
Basis rules differ by transfer type. A home held at death is described as having a basis stepped up to fair market value, while a gifted home takes the donor's basis plus gift tax paid.