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used by the owner or lessee of real

reviewing a crop plan and financial

1. Subtract the average annual

property (or by the employees of the

reports each season or business year.

state and local real estate taxes on

owner or lessee) to operate the farm or

actual tracts of comparable real

In determining whether the required

business. A farm residence which the

property from the average annual gross

participation has occurred, disregard

decedent had occupied is considered to

cash rental for that same comparable

brief periods (that is, 30 days or less)

have been occupied for the purpose of

property and

during which there was no material

operating the farm even when a family

2. Divide the result in (1) by the

participation, as long as such periods

member and not the decedent was the

average annual effective interest rate

were both preceded and followed by

person materially participating in the

charged for all new Federal Land Bank

substantial periods (more than 120

operation of the farm.

loans.

days) during which there was

uninterrupted material participation.

Qualified real property also includes

The computation of each average

roads, buildings, and other structures

Retirement or disability. If, on the

annual amount is based on the 5 most

and improvements functionally related

date of death, the time period for

recent calendar years ending before the

to the qualified use.

material participation could not be met

date of the decedent’s death. See

because the decedent had retired or

Elements of value such as mineral

Effective interest rate below.

was disabled, a substitute period may

rights that are not related to the farm or

Gross cash rental. Generally,

apply. The decedent must have retired

business use are not eligible for

gross cash rental is the total amount of

on social security or been disabled for a

special-use valuation.

cash received in a calendar year for the

continuous period ending with death. A

Property acquired from the

use of actual tracts of comparable farm

person is disabled for this purpose if he

decedent. Property is considered to

or she was mentally or physically

real property in the same locality as the

have been acquired from or to have

property being specially valued. You

unable to materially participate in the

passed from the decedent if one of the

may not use:

operation of the farm or other business.

following applies:

•

Appraisals or other statements

•

The substitute time period for

The property is considered to have

regarding rental value or areawide

material participation for these

been acquired from or to have passed

averages of rentals, or

decedents is a period totaling at least 5

from the decedent under section

•

Rents that are paid wholly or partly

years out of the 8-year period that

1014(b) (relating to basis of property

in-kind, and the amount of rent may not

ended on the earlier of:

acquired from a decedent);

be based on production.

•

The date the decedent began

The property is acquired by any

The rental must have resulted from an

receiving social security benefits or

person from the estate; or

arm’s-length transaction. Also, the

•

The date the decedent became

The property is acquired by any

amount of rent is not reduced by the

disabled.

person from a trust, to the extent the

amount of any expenses or liabilities

property is includible in the gross

Surviving spouse. A surviving

associated with the farm operation or

estate.

spouse who received qualified real

the lease.

property from the predeceased spouse

Qualified heir. A person is a qualified

Comparable property.

is considered to have materially

heir of property if he or she is a

Comparable property must be situated

participated if he or she was engaged

member of the decedent’s family and

in the same locality as the specially

in the active management of the farm

acquired or received the property from

valued property as determined by

or other business. If the surviving

the decedent. If a qualified heir

generally accepted real property

spouse died within 8 years of the first

disposes of any interest in qualified real

valuation rules. The determination of

spouse’s death, you may add the

property to any member of his or her

comparability is based on all the facts

period of material participation of the

family, that person will then be treated

and circumstances. It is often

predeceased spouse to the period of

as the qualified heir for that interest.

necessary to value land in segments

active management by the surviving

The term “member of the family”

where there are different uses or land

spouse to determine if the surviving

includes only:

characteristics included in the specially

spouse’s estate qualifies for special-use

•

An ancestor (parent, grandparent,

valued land.

valuation. To qualify for this, the

etc.) of the individual;

property must have been eligible for

•

The following list contains some of

The spouse of the individual;

special-use valuation in the

•

the factors considered in determining

The lineal descendant (child,

predeceased spouse’s estate, though it

comparability:

stepchild, grandchild, etc.) of the

does not have to have been elected by

•

Similarity of soil;

individual, the individual’s spouse, or a

that estate.

•

Whether the crops grown would

parent of the individual; or

•

For additional details regarding

deplete the soil in a similar manner;

The spouse, widow, or widower of

•

material participation, see Regulations

Types of soil conservation

any lineal descendant described above.

section 20.2032A-3(e).

techniques that have been practiced on

A legally adopted child of an individual

the two properties;

is treated as a child of that individual by

Valuation Methods

•

Whether the two properties are

blood.

The primary method of valuing

subject to flooding;

Material Participation

special-use value property that is used

•

Slope of the land;

for farming purposes is the annual

•

To elect special-use valuation, either

For livestock operations, the carrying

gross cash rental method. If

the decedent or a member of his or her

capacity of the land;

comparable gross cash rentals are not

•

family must have materially participated

For timbered land, whether the

available, you can substitute

in the operation of the farm or other

timber is comparable;

comparable average annual net share

•

business for at least 5 of the 8 years

Whether the property as a whole is

rentals. If neither of these are available,

ending on the date of the decedent’s

unified or segmented. If segmented, the

or if you so elect, you can use the

death. The existence of material

availability of the means necessary for

method for valuing real property in a

participation is a factual determination,

movement among the different

closely held business.

but passively collecting rents, salaries,

sections;

•

draws, dividends, or other income from

Average annual gross cash rental.

Number, types, and conditions of all

the farm or other business does not

Generally, the special-use value of

buildings and other fixed improvements

constitute material participation. Neither

property that is used for farming

located on the properties and their

does merely advancing capital and

purposes is determined as follows:

location as it affects efficient

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Part Instructions

Instructions For Form 706 - United States Estate (And Generation-Skipping Transfer) Tax Return - 2011 Page 9

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