Overview

Main Menu Name: Spec. Use

Determines the special (current) use value of farm or business real property using the formula provided in the Internal Revenue Code.

In this article:

• Background
• Getting Started
• Entering Data
• Results

Background

If certain criteria are met, an executor may choose to value property based on its actual use instead of on its "highest and best" use. In some cases, this tactic reduces the value of farm and business real property. In 2019, the value may be reduced up to $1,180,000. While several methods of valuing this property exist, the valuation method used by this calculation is the most favorable and conclusive method. This method's formula, shown below, capitalizes the potential flow of income from comparable property.

Special Use Value = (a -b) / c

Where:

The income to be capitalized is the average annual gross cash rental income (for five years prior to the decedent's death) minus the average annual state and local real estate taxes (for the same five year period) applicable for that comparable land.

To qualify as comparable land, the land must be used for farming purposes and must be located in the same area as the farmland to be valued.

The executor is not permitted to use cash rentals from the farm to be valued. Rentals used from comparable farmland must have been the result of arms' length bargaining.

The capitalization rate is the average billing rate charged on new agricultural loans to farmers in the farm credit district where the qualified property is located. For example, Rev. Rul. 2000-26 sets an interest rate of 9.82% for the Columbia Farm Credit Bank District for 2000 valuations.

Getting Started

If certain criteria are met, an executor may choose to value property based on its actual use instead of on its "highest and best" use. In some cases, this tactic reduces the value of farm and business real property. For dates of death in 2019, the value may be reduced by $1,160,000, in 2018 by $1,140,000, in 2017 by $1,120,000, in 2016 by $1,110,000; in 2015, by $1,100,000; in 2014, by $1,090,000; in 2013, by $1,070,000. In prior years, the limit was lower.

While several methods of valuing this property exist, the valuation method used by this calculation is the most favorable and conclusive method. This method's formula, shown below, capitalizes the potential flow of income from comparable property.

Where:

a = Average annual gross cash rental for comparable land.

b = Average annual state and local real estate taxes for such comparable land.

c = Average annual effective interest rate for all new federal land bank loans.

The income to be capitalized is the average annual gross cash rental income (for five years prior to the decedent's death) minus the average annual state and local real estate taxes (for the same five year period) applicable for that comparable land.

To qualify as comparable land, the land must be used for farming purposes and must be located in the same area as the farmland to be valued.

The executor is not permitted to use cash rentals from the farm to be valued. Rentals used from comparable farmland must have been the result of arms' length bargaining.

The capitalization rate is the average billing rate charged on new agricultural loans to farmers in the farm credit district where the qualified property is located.

Entering Data

1. Capitalization Rate:  Enter the appropriate capitalization rate. This rate is the average annual effective interest rate applied to new federal land bank loans. If you do not know the rate, click the Capitalization Rates button to see the most current rates known.
2.  Capitalization Rates:  Click the button to access a menu of known capitalization rates. Click on the row of the appropriate rate for your state to have the rate automatically applied to the program calculations.
3.  Years Prior to Death:  Enter the year prior to the decedent's death. The program will automatically enter the four previous years from the year entered.
4.  Gross Rent of Comparable Land:  Enter the gross rent of comparable land for the given year.
5.  Real Estate Taxes:  Enter the real estate taxes for the given year.

Results

The program show the special (current) use value of farm or business real property. The calculation uses a formula provided in the Internal Revenue Code to calculate the property's special use value.

Essentially, the calculation determines the five-year average of the gross rent from the comparable land, subtracts the five-year average of real estate taxes, and capitalizes the difference. The result is the "Special Use Value."