IRS Form 706 (Schedule T) – In the realm of estate planning and taxation, understanding specialized IRS forms can significantly impact the financial legacy left to heirs. IRS Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return, includes various schedules to handle specific assets and elections. One critical component is Schedule T, which facilitates the Section 2032A election for special use valuation of qualified farm or closely held business real property. This valuation method allows estates to reduce taxable value based on the property’s actual use rather than its fair market value (FMV), potentially lowering estate taxes for family-owned operations. This guide explores the ins and outs of IRS Form 706 Schedule T and Section 2032A property valuation, drawing from official IRS resources to help executors and heirs navigate this process.
What is Section 2032A Special Use Valuation?
Section 2032A of the Internal Revenue Code provides a special valuation option for certain real property used in farming or closely held businesses. Instead of valuing the property at its highest and best use (e.g., potential development value), it can be valued based on its current qualified use, such as agricultural production or business operations. This election aims to preserve family farms and businesses by making estate taxes more manageable, preventing forced sales to cover tax liabilities.
The special use value is capped such that it cannot reduce the property’s FMV by more than $1,420,000 (for decedents dying in 2025; this amount is inflation-adjusted annually). Both special use valuation and alternate valuation under Section 2032 can be elected simultaneously. However, this comes with strings attached, including a 10-year commitment to continue the qualified use and potential recapture taxes if the property is sold or repurposed early.
Schedule T (Form 706) is the specific form used to make this election. It’s attached to Form 706 and includes details on the property, valuations, and required agreements. You can download the latest version of Schedule T from the IRS website: https://www.irs.gov/pub/irs-pdf/f706st.pdf.
Eligibility Requirements for Section 2032A Valuation
Not every estate qualifies for this special valuation. The IRS sets strict criteria to ensure the property is genuinely part of a family-operated farm or business. Here’s a breakdown of the key requirements:
| Requirement | Description |
|---|---|
| Decedent’s Status | The decedent must have been a U.S. citizen or resident at the time of death. |
| Property Location and Use | The real property must be located in the U.S. and used for farming, trade, or business by the decedent or a family member. This includes net cash rentals to family members but excludes passive investments or non-family rentals. |
| Ownership and Material Participation | The property must have been owned and used in a qualified manner for at least 5 out of the 8 years preceding the decedent’s death. The decedent or a family member must have materially participated (active involvement) during this period. Affidavits and evidence of participation are required. |
| Passing to Qualified Heirs | The property must pass to a “qualified heir,” such as a spouse, lineal descendant, or their spouses. Indirect ownership through trusts, partnerships, or corporations may qualify if closely held. |
| Estate Composition Thresholds | At least 50% of the adjusted gross estate (FMV minus debts) must consist of qualified real and personal property passing to heirs, with at least 25% being qualified real property. |
| Generation-Skipping Transfer (GST) Considerations | If the property passes to skip persons (e.g., grandchildren), additional GST tax implications apply, and exemptions may need allocation. |
Qualified woodlands and related improvements (e.g., residential buildings) can also be included, provided they meet the criteria. If the estate doesn’t meet these thresholds initially, a protective election can be filed to preserve the option.
How to Make the Section 2032A Election on Schedule T?
Making the election involves careful preparation and timely filing with Form 706. Follow these steps:
- Check the Box on Form 706: Indicate “Yes” on Part III, line 2 of Form 706 to signal the election.
- Value the Property: Report the special use value on relevant schedules (e.g., Schedule A for real estate), noting “Section 2032A valuation” in the description.
- Complete Schedule T: Fill out all parts, including property descriptions, FMV and special use values, and GST computations if applicable. Use valuation methods like annualized cash rentals minus taxes divided by interest rates for farms, or income capitalization for businesses.
- Attach Required Documents: Include appraisals for FMV, affidavits for material participation, and a notice of election statement detailing ownership history and values.
- File on Time: The election must be on the first filed Form 706 return, even if late. It’s irrevocable once made.
For protective elections, complete minimal sections of Schedule T and file a supplemental return if eligibility is later confirmed.
The Agreement Under Section 2032A
A key element of Schedule T is the agreement in Part III (and Part IV if needed), which must be signed by all qualified heirs and other interested parties. This binding contract consents to personal liability for recapture taxes and commits to maintaining the qualified use for at least 10 years. It includes:
- Listing all parties’ names, addresses, TINs, relationships, and interests.
- Property descriptions and values.
- Designation of an agent for IRS communications.
- Acknowledgment of potential additional estate and GST taxes on early disposition or cessation.
Without a fully executed agreement, the election is invalid.
Understanding Recapture Taxes and Risks
The trade-off for lower initial taxes is the risk of recapture. If a qualified heir disposes of the property or stops the qualified use within 10 years (or 15 years in some cases), additional taxes are due based on the difference between FMV and special use value, plus interest. Heirs are personally liable, and a special lien is placed on the property under Section 6324B. Report any such events on Form 706-A.
GST tax may also be recaptured if applicable, though allocated exemptions can offset this.
Conclusion: Is Section 2032A Right for Your Estate?
Utilizing IRS Form 706 Schedule T for Section 2032A property valuation can be a powerful tool for preserving family legacies in agriculture and business. However, it requires meticulous compliance to avoid pitfalls like recapture taxes. Always consult a tax professional or attorney familiar with estate taxes to ensure eligibility and proper filing. For the most current guidance, refer to the IRS website and download forms like Schedule T directly from https://www.irs.gov/pub/irs-pdf/f706st.pdf. Staying informed with trusted IRS resources ensures your estate planning aligns with the latest regulations.