In general, real property must be valued at its fair market value for estate tax purposes. Fair market value normally is determined by a property's "highest and best use," that is, the use that would make the property the most valuable. This is true even if the property currently is not being employed in its highest and best use. A significant estate tax exception applies for closely held farms and other family-owned businesses called special use valuation (“SUV”). If all the requirements are met, the property will be valued in accordance with its actual (current) use. However, there is a ceiling to the amount of the SUV that can be deducted from the realty’s fair value, which is periodically indexed for inflation.
The SUV enables farm families to pass farmland with high development value to their heirs at a reduced estate transfer value. While the SUV method can greatly reduce the taxable estate, the amount of the SUV estate reduction does not receive a step-up in basis when transferred.
There are restrictions associated with the SUV. To qualify for the estate reduction, the net value of the farm/business property must be at least 50 percent of the decedent's gross estate and at least 25 percent of the decedent's adjusted gross estate (the gross estate reduced by certain expenses). In addition, the decedent must have transferred the farm to specified close family relatives. Finally, the farm/business must have been owned, and to a certain degree, operated by the decedent or a close family relative, for a specified period of years before the decedent died. The individual must farm the land and cannot cash rent the land to someone else for ten years subsequent to the SUV valuation date.
