Form It-1 And Instructions - Inheritance Tax

If the ownership is indirect, the business must qualify as a

Real property may qualify for the Section 2032A election if:

closely held business under Section 6166. The ownership,

1. The decedent was a U.S. citizen or resident at the time

when combined with periods of direct ownership, must

of death;

meet the requirements of Section 6166 on the date of the

2. The real property is located in the United States;

decedent’s death and for a period of time that equals at least

3. At the decedent’s death, the real property was used by

five of the eight years preceding death.

the decedent or a family member for farming or in a trade

If the property was leased by the decedent to a closely held

or business, or was rented for such use by either the sur-

business, it qualifies as long as the business entity to which

viving spouse or a lineal descendant of the decedent to

it was rented was a closely held business with respect to the

a family member on a net cash basis;

decedent on the date of the decedent’s death and for suffi-

4. The real property was acquired from or passed from the

cient time to meet the “five in eight years” test property.

decedent to a qualified heir of the decedent;

5. The real property was owned and used in a qualified

Structures and other real property improvements

manner by the decedent or a member of the decedent’s

family during five of the eight years before the decedent’s

Qualified real property includes residential buildings and

death;

structures and real property improvements regularly occu-

pied or used by the owner or lessee of real property (or by

6. There was material participation by the decedent or a

member of the decedent’s family during five of the eight

the employees of the owner or lessee) to operate the farm

years before the decedent’s death; and

or business. A farm residence which the decedent had occu-

pied is considered to have been occupied for the purpose of

7. The qualified property meets the following percentage

operating the farm even when a family member and not the

requirements:

decedent was the person materially participating in the op-

a. At least 50 percent of the adjusted value of the gross

eration of the farm.

estate must consist of the adjusted value of real or per-

Qualified real property also includes roads, buildings, and

sonal property that was being used as a farm or in a

other structures and improvements functionally related to

closely held business and that was acquired from, or

the qualified use.

passed from, the decedent to a qualified heir of the de-

cedent, and

Elements of value such as mineral rights that are not related

to the farm or business use are not eligible for special-use

b. At least 25 percent of the adjusted value of the gross

valuation.

estate must consist of the adjusted value of qualified

farm or closely held business real property.

Property acquired from the decedent

For this purpose, adjusted value is the value of property

Property is considered to have been acquired from or to have

determined without regard to its special-use value. The

passed from the decedent if one of the following applies:

value is reduced for unpaid mortgages on the property or

• The property is considered to have been acquired from or

any indebtedness against the property, if the full value of the

to have passed from the decedent under Section 1014(b)

decedent’s interest in the property (not reduced by such

(relating to basis of property acquired from a decedent).

mortgage or indebtedness) is included in the value of the

• The property is acquired by any person from the estate.

gross estate. The adjusted value of the qualified real and

• The property is acquired by any person from a trust, to the

personal property used in different businesses may be com-

extent the property is includible in the gross estate.

bined to meet the 50 percent and 25 percent requirements.

Qualified heir

Qualified real property—Qualified use

A person is a qualified heir of property if he or she is a mem-

The term qualified use means the use of the property as a

ber of the decedent’s family and acquired or received the

farm for farming purposes or the use of property in a trade

property from the decedent. If a qualified heir disposes of

or business other than farming. Trade or business applies

any interest in qualified real property to any member of his

only to the active conduct of a business. It does not apply to

or her family, that person will then be treated as the quali-

passive investment activities or the mere individual, or pas-

fied heir with respect to that interest.

sive rental of property to a person other than a member of

the decedent’s family. Also, no trade or business is present

The term member of the family includes only:

in the case of activities not engaged in for profit.

• An ancestor (parent, grandparent, etc.) of the individual;

• The spouse of the individual;

Ownership

• The lineal descendant (child, stepchild, grandchild, etc.) of

To qualify as special-use property, the decedent or a mem-

the individual, the individual’s spouse, or a parent of the

ber of the decedent’s family must have owned and used the

individual; or

property in a qualified use for five of the last eight years be-

• The spouse, widow, or widower of any lineal descendant

fore the decedent’s death. Ownership may be direct or in-

described above.

direct through a corporation, a partnership, or a trust.

A legally adopted child of an individual is treated as a child

of that individual by blood.

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Form It-1 And Instructions - Inheritance Tax - 2004 Page 9

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