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Estate taxes will be due on estates exceeding $5.6 million beginning with this tax season, if assets are passed on to anyone other than to a spouse. As a result, the estate has to pay this tax. While this seemingly is only a problem for the families of high-income individuals, if you are the owner of a farm, your land may have appreciated in value enough to trigger the tax but you may have few or no liquid assets to cover the bills that are due to the IRS. When this occurs, there may be no option but for inheritors to sell some of the land in order to pay the taxes.
A special rule (special use valuation) applicable to farmers which 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: $1.12 million for 2017 and $1.14 million for 2018.
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.