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evidence. The IRS may require you to

property, if the full value of the decedent’s

(relating to basis of property acquired

submit additional evidence, if necessary.

interest in the property (not reduced by

from a decedent);

•

such mortgage or indebtedness) is

The property is acquired by any person

If the alternate valuation method is

included in the value of the gross estate.

from the estate; or

used, the values of life estates,

•

The adjusted value of the qualified real

The property is acquired by any person

remainders, and similar interests are

and personal property used in different

from a trust, to the extent the property is

figured using the age of the recipient on

businesses may be combined to meet the

includible in the gross estate.

the date of the decedent’s death and the

50% and 25% requirements.

value of the property on the alternate

Qualified heir. A person is a qualified

valuation date.

heir of property if he or she is a member

Qualified Real Property

of the decedent’s family and acquired or

Line 2—Special-Use Valuation

Qualified use. The term qualified use

received the property from the decedent.

of Section 2032A

means the use of the property as a farm

If a qualified heir disposes of any interest

for farming purposes or the use of

in qualified real property to any member

In general. Under section 2032A, you

property in a trade or business other than

of his or her family, that person will then

may elect to value certain farm and

farming. Trade or business applies only to

be treated as the qualified heir with

closely held business real property at its

the active conduct of a business. It does

respect to that interest.

farm or business use value rather than its

not apply to passive investment activities

fair market value (FMV). You may elect

The term “member of the family”

or the mere passive rental of property to a

both special-use valuation and alternate

includes only:

person other than a member of the

•

valuation.

An ancestor (parent, grandparent, etc.)

decedent’s family. Also, no trade or

of the individual;

To elect this valuation, you must check

business is present in the case of

•

The spouse of the individual;

“Yes” to line 2 and complete and attach

activities not engaged in for profit.

•

The lineal descendant (child, stepchild,

Schedule A-1 and its required additional

Ownership. To qualify as special-use

grandchild, etc.) of the individual, the

statements. You must file Schedule A-1

property, the decedent or a member of

individual’s spouse, or a parent of the

and its required attachments with Form

the decedent’s family must have owned

individual; or

706 for this election to be valid. You may

and used the property in a qualified use

•

The spouse, widow, or widower of any

make the election on a late filed return so

for 5 of the last 8 years before the

lineal descendant described above.

long as it is the first return filed.

decedent’s death. Ownership may be

A legally adopted child of an individual is

The total value of the property valued

direct or indirect through a corporation, a

treated as a child of that individual by

under section 2032A may not be

partnership, or a trust.

blood.

decreased from FMV by more than

If the ownership is indirect, the

$870,000 for decedents dying in 2005.

Material Participation

business must qualify as a closely held

Real property may qualify for the

business under section 6166. The

To elect special-use valuation, either the

section 2032A election if:

ownership, when combined with periods

decedent or a member of his or her family

of direct ownership, must meet the

must have materially participated in the

1. The decedent was a U.S. citizen or

requirements of section 6166 on the date

operation of the farm or other business for

resident at the time of death;

of the decedent’s death and for a period

at least 5 of the 8 years ending on the

2. The real property is located in the

of time that equals at least 5 of the 8

date of the decedent’s death. The

United States;

years preceding death.

existence of material participation is a

3. At the decedent’s death, the real

factual determination, but passively

property was used by the decedent or a

If the property was leased by the

collecting rents, salaries, draws,

family member for farming or in a trade or

decedent to a closely held business, it

business, or was rented for such use by

dividends, or other income from the farm

qualifies as long as the business entity to

or other business does not constitute

either the surviving spouse or a lineal

which it was rented was a closely held

descendant of the decedent to a family

material participation. Neither does

business with respect to the decedent on

merely advancing capital and reviewing a

member on a net cash basis;

the date of the decedent’s death and for

4. The real property was acquired

crop plan and financial reports each

sufficient time to meet the “5 in 8 years”

season or business year.

from or passed from the decedent to a

test explained above.

qualified heir of the decedent;

Structures and other real property

In determining whether the required

5. The real property was owned and

improvements. Qualified real property

participation has occurred, disregard brief

used in a qualified manner by the

includes residential buildings and other

periods (that is, 30 days or less) during

decedent or a member of the decedent’s

structures and real property

which there was no material participation,

family during 5 of the 8 years before the

improvements regularly occupied or used

as long as such periods were both

decedent’s death;

by the owner or lessee of real property (or

preceded and followed by substantial

6. There was material participation by

by the employees of the owner or lessee)

periods (more than 120 days) during

the decedent or a member of the

to operate the farm or business. A farm

which there was uninterrupted material

decedent’s family during 5 of the 8 years

residence which the decedent had

participation.

before the decedent’s death; and

occupied is considered to have been

Retirement or disability. If, on the date

7. The qualified property meets the

occupied for the purpose of operating the

of death, the time period for material

following percentage requirements:

farm even when a family member and not

participation could not be met because

a. At least 50% of the adjusted value

the decedent was the person materially

the decedent had retired or was disabled,

of the gross estate must consist of the

participating in the operation of the farm.

a substitute period may apply. The

adjusted value of real or personal

Qualified real property also includes

decedent must have retired on Social

property that was being used as a farm or

roads, buildings, and other structures and

Security or been disabled for a

in a closely held business and that was

improvements functionally related to the

continuous period ending with death. A

acquired from, or passed from, the

qualified use.

person is disabled for this purpose if he or

decedent to a qualified heir of the

she was mentally or physically unable to

Elements of value such as mineral

decedent, and

materially participate in the operation of

rights that are not related to the farm or

b. At least 25% of the adjusted value

the farm or other business.

business use are not eligible for

of the gross estate must consist of the

special-use valuation.

The substitute time period for material

adjusted value of qualified farm or closely

Property acquired from the decedent.

participation for these decedents is a

held business real property.

Property is considered to have been

period totaling at least 5 years out of the

For this purpose, adjusted value is the

acquired from or to have passed from the

8-year period that ended on the earlier of:

•

value of property determined without

decedent if one of the following applies.

The date the decedent began receiving

•

regard to its special-use value. The value

The property is considered to have

social security benefits, or

•

is reduced for unpaid mortgages on the

been acquired from or to have passed

The date the decedent became

property or any indebtedness against the

from the decedent under section 1014(b)

disabled.

-7-

Part Instructions

Instructions For Form 706 - United States Estate (And Generation-Skipping Transfer) Tax Return - 2005 Page 7

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