This Tax Tip Podcast or Blog Post is in response to recent requests for general information on the valuation of closely held business real property for federal estate tax purposes.
Generally, the value of all property included in a decedent’s gross estate is the property’s fair market value on the date of the decedent’s death or on an alternate valuation date. In certain cases, however, the executor may elect to value certain closely held business real property at its business use value rather than at its fair market value. The may result in a lower value of the property for estate tax purposes. The total reduction in value of the property valued under this special rule is limited to a specified dollar amount that is adjusted each year for inflation.
Real property may qualify for the special use value election if:
(1) the decedent was a U.S. citizen or resident at the time of his or her death;
(2) the real property is located in the United States;
(3) at the decedent’s death, the real property was used by the decedent or a family member in a trade or business, or was rented for such use by either the surviving spouse or a lineal descendant of the decedent to a family member on a net cash basis;
(4) the real property was acquired from or passed from the decedent to a qualified heir of the decedent;
(5) the real property was owned and used in a qualified manner by the decedent or a member of the decedent’s family during five of the eight years before the decedent’s death;
(6) there was material participation by the decedent or a member of the decedent’s family during five of the eight years before the decedent’s death; and
(7) the qualified property meets the following percentage requirements:
(a) at least 50 percent of the adjusted value of the gross estate consists of the adjusted value of real or personal property that was being used as in a closely held business and that was acquired from, or passed from, the decedent to a qualified heir of the decedent, and
(b) at least 25 percent of the adjusted value of the gross estate consists of the adjusted value of qualified farm or closely held business real property.
You, as executor, make the special use value election in Part 3 of Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. You use Schedule A-1, which is part of Form 706, to report the additional information that must be submitted to support the election. If you elect special-use valuation for the estate tax, you must also elect it for the generation-skipping transfer (GST) tax and vice versa. Further, you must value each specific property interest at the same value for GST tax purposes as you value it for estate tax purposes.
Please call me at your convenience so that we can discuss the special use value election as it applies to your particular situation.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.