2032A Estate valuation
by Mason Spurgeon, Certified General Real Estate Appraiser
No one ever wants to deal with the IRS, and they especially don’t want to over-pay them. I remember a funny quote from Ron Paul: “Don’t steal! The Government Hates Competition,” and I know that’s how most of us feel. The IRS is a huge bureaucracy that very few want to question, but with the right help, loopholes within the tax code can be used to reduce your tax burden, legally. One of the ways your tax burden can be reduced is through the 2032A, Special Use Valuation.
The Internal Revenue Code Section 2032A, Special Use Valuation is a valuation method used in figuring the federal taxes for an estate. An appraiser normally values a property according to its fair market value (what the tract would sell for on the open market). However, with a 2032A valuation, the value is based on the property’s current use. This can typically reduce the value of the land and in turn reduce the tax burden. This all sounds great, but with the IRS there are always technicalities.
The first task is making sure that the real estate qualifies for the 2032A Valuation election. There are several rules that dictate if a property applies. The list below summarizes requirements from the IRS website.
- The decedent (the person who has died) must be a US citizen.
- The real property must be in the United States.
- The property must have been used by the decedent or family member for farming in a qualified manner for 5 out of the last 8 years.
- Property must pass to a qualifying heir.
- The farm assets, both real and personal, must compose at least 50% of the estate and the real property must compose at least 25% of the total value of the adjusted estate.
If these conditions are met the executor can elect to use the 2032A Special Use Valuation. There are still several steps and forms to be completed before the taxes can be filed. One of the most important steps is getting a real estate appraisal from a qualified real estate appraiser.
The appraiser should start by finding comparable properties in the immediate market area that are currently leased and have been leased on a cash-rent basis for the past five years. The comparable rental property must be very similar to the subject property in location, productivity, and all other aspects, if possible. The five-year cash rental data is then averaged on a per-acre basis along with the five-year annual real estate taxes, local, state, and federal taxes, which are deducted from the cash rent. That value is then divided by the average annual effective interest rate of all new Federal Land Bank loans. The image below gives an example:
While this number does appear to be high as a price-per-acre, it is much lower than the market value which is $13,400 per acre. This is a huge reduction in the value used to figure taxes for the estate. The difference between the fair market value and the special use valuation becomes the amount of the lien that can be recaptured.
That brings us to the downside of using this type of valuation. The step-up in value for the real estate basis as of the date of death will be the special use value, not the fair market value. This could create a large tax burden for the heirs if the property is sold after the 10-year period. A tax professional, such as a lawyer or accountant, should be contacted to help with any of your future estate planning or questions about filing a 2032A Special Use Valuation with the IRS. Spurgeon Appraisals would be happy to help with the valuation/appraisal side of the process.
Just remember when selecting a real estate appraiser, the lowest cost or the quickest completion time is not always the best. Real estate appraisers are not all created equal, and an appraisal is only as good as the data used in the report. At Spurgeon Appraisals, we take the time to find and confirm the best and most recent data available. Call or email us today with any questions you may have about your pending project.