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Surviving spouse. A surviving spouse

or land characteristics included in the

if you elect to use it. Under this method,

who received qualified real property from

specially valued land. The following list

the following factors are considered:

•

the predeceased spouse is considered to

contains some of the factors considered

The capitalization of income that the

have materially participated if he or she

in determining comparability:

property can be expected to yield for

•

was engaged in the active management

Similarity of soil;

farming or for closely held business

•

of the farm or other business. If the

Whether the crops grown would

purposes over a reasonable period of

surviving spouse died within 8 years of

deplete the soil in a similar manner;

time with prudent management and

•

the first spouse’s death, you may add the

Types of soil conservation techniques

traditional cropping patterns for the area,

period of material participation of the

that have been practiced on the 2

taking into account soil capacity, terrain

predeceased spouse to the period of

properties;

configuration, and similar factors;

•

active management by the surviving

Whether the 2 properties are subject to

The capitalization of the fair rental

spouse to determine if the surviving

flooding;

value of the land for farming or for closely

•

spouse’s estate qualifies for special-use

Slope of the land;

held business purposes;

•

valuation. To qualify for this, the property

For livestock operations, the carrying

The assessed land values in a state

must have been eligible for special-use

capacity of the land;

that provides a differential or use value

•

valuation in the predeceased spouse’s

For timbered land, whether the timber

assessment law for farmland or closely

estate, though it does not have to have

is comparable;

held business;

•

been elected by that estate.

Whether the property as a whole is

Comparable sales of other farm or

unified or segmented. If segmented, the

closely held business land in the same

For additional details regarding

availability of the means necessary for

geographical area far enough removed

material participation, see Regulations

movement among the different sections;

from a metropolitan or resort area so that

section 20.2032A-3(e).

•

Number, types, and conditions of all

nonagricultural use is not a significant

Valuation Methods

buildings and other fixed improvements

factor in the sales price; and

•

The primary method of valuing

located on the properties and their

Any other factor that fairly values the

special-use value property that is used for

location as it affects efficient

farm or closely held business value of the

farming purposes is the annual gross

management, use, and value of the

property.

cash rental method. If comparable gross

property; and

•

Making the Election

cash rentals are not available, you can

Availability and type of transportation

substitute comparable average annual net

facilities in terms of costs and of proximity

Include the words “section 2032A

share rentals. If neither of these are

of the properties to local markets.

valuation” in the “Description” column of

available, or if you so elect, you can use

any Form 706 schedule if section 2032A

You must specifically identify on the

the method for valuing real property in a

property is included in the decedent’s

return the property being used as

closely held business.

gross estate.

comparable property. Use the type of

Average annual gross cash rental.

descriptions used to list real property on

An election under section 2032A need

Generally, the special-use value of

Schedule A.

not include all the property in an estate

property that is used for farming purposes

that is eligible for special-use valuation,

Effective interest rate. See Rev. Rul.

is determined as follows:

but sufficient property to satisfy the

2005-41, 2005-28 I.R.B. 69, for the

1. Subtract the average annual state

threshold requirements of section

effective annual interest rates in effect for

and local real estate taxes on actual

2032A(b)(1)(B) must be specially valued

2005.

tracts of comparable real property from

under the election.

the average annual gross cash rental for

Net share rental. You may use

If joint or undivided interests (that is,

that same comparable property, and

average annual net share rental from

interests as joint tenants or tenants in

2. Divide the result in (1) by the

comparable land only if there is no

common) in the same property are

average annual effective interest rate

comparable land from which average

received from a decedent by qualified

charged for all new Federal Land Bank

annual gross cash rental can be

heirs, an election with respect to one

loans.

determined. Net share rental is the

heir’s joint or undivided interest need not

difference between the gross value of

include any other heir’s interest in the

The computation of each average

produce received by the lessor from the

same property if the electing heir’s

annual amount is based on the 5 most

comparable land and the cash operating

interest plus other property to be specially

recent calendar years ending before the

expenses (other than real estate taxes) of

valued satisfies the requirements of

date of the decedent’s death.

growing the produce that, under the

section 2032A(b)(1)(B).

Gross cash rental. Generally, gross

lease, are paid by the lessor. The

cash rental is the total amount of cash

production of the produce must be the

If successive interests (that is, life

received in a calendar year for the use of

business purpose of the farming

estates and remainder interests) are

actual tracts of comparable farm real

operation. For this purpose, produce

created by a decedent in otherwise

property in the same locality as the

includes livestock.

qualified property, an election under

property being specially valued. You may

section 2032A is available only with

The gross value of the produce is

not use appraisals or other statements

respect to that property (or part) in which

generally the gross amount received if the

regarding rental value or areawide

qualified heirs of the decedent receive all

produce was disposed of in an

averages of rentals. You may not use

of the successive interests, and such an

arm’s-length transaction within the period

rents that are paid wholly or partly in-kind,

election must include the interests of all of

established by the Department of

and the amount of rent may not be based

those heirs.

Agriculture for its price support program.

on production. The rental must have

Otherwise, the value is the weighted

For example, if a surviving spouse

resulted from an arm’s-length transaction.

receives a life estate in otherwise

average price for which the produce sold

Also, the amount of rent is not reduced by

on the closest national or regional

qualified property and the spouse’s

the amount of any expenses or liabilities

commodities market. The value is figured

brother receives a remainder interest in

associated with the farm operation or the

for the date or dates on which the lessor

fee, no part of the property may be valued

lease.

received (or constructively received) the

under a section 2032A election.

Comparable property. Comparable

produce.

property must be situated in the same

Where successive interests in

locality as the specially valued property

Valuing a real property interest in

specially valued property are created,

as determined by generally accepted real

closely held business. Use this method

remainder interests are treated as being

property valuation rules. The

to determine the special-use valuation for

received by qualified heirs only if the

determination of comparability is based

qualifying real property used in a trade or

remainder interests are not contingent on

on all the facts and circumstances. It is

business other than farming. You may

surviving a nonfamily member or are not

often necessary to value land in

also use this method for qualifying farm

subject to divestment in favor of a

segments where there are different uses

property if there is no comparable land or

nonfamily member.

-8-

Part Instructions

Instructions For Form 706 - United States Estate (And Generation-Skipping Transfer) Tax Return - 2005 Page 8

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