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decedent’s family during 5 of the 8

Structures and other real property

participation is a factual determination,

years before the decedent’s death; and

improvements. Qualified real

but passively collecting rents, salaries,

7. The qualified property meets the

property includes residential buildings

draws, dividends, or other income from

following percentage requirements:

and other structures and real property

the farm or other business does not

improvements regularly occupied or

constitute material participation. Neither

a. At least 50% of the adjusted

used by the owner or lessee of real

does merely advancing capital and

value of the gross estate must consist

property (or by the employees of the

reviewing a crop plan and financial

of the adjusted value of real or personal

owner or lessee) to operate the farm or

reports each season or business year.

property that was being used as a farm

business. A farm residence which the

or in a closely held business and that

In determining whether the required

decedent had occupied is considered to

was acquired from, or passed from, the

participation has occurred, disregard

have been occupied for the purpose of

decedent to a qualified heir of the

brief periods (that is, 30 days or less)

operating the farm even when a family

decedent, and

during which there was no material

member and not the decedent was the

b. At least 25% of the adjusted

participation, as long as such periods

person materially participating in the

value of the gross estate must consist

were both preceded and followed by

operation of the farm.

of the adjusted value of qualified farm

substantial periods (more than 120

or closely held business real property.

Qualified real property also includes

days) during which there was

roads, buildings, and other structures

uninterrupted material participation.

For this purpose, adjusted value is

and improvements functionally related

Retirement or disability. If, on the

the value of property determined

to the qualified use.

date of death, the time period for

without regard to its special-use value.

material participation could not be met

Elements of value such as mineral

The value is reduced for unpaid

rights that are not related to the farm or

because the decedent had retired or

mortgages on the property or any

was disabled, a substitute period may

business use are not eligible for

indebtedness against the property, if

apply. The decedent must have retired

special-use valuation.

the full value of the decedent’s interest

on Social Security or been disabled for

Property acquired from the

in the property (not reduced by such

a continuous period ending with death.

decedent. Property is considered to

mortgage or indebtedness) is included

A person is disabled for this purpose if

have been acquired from or to have

in the value of the gross estate. The

he or she was mentally or physically

passed from the decedent if one of the

adjusted value of the qualified real and

unable to materially participate in the

following applies.

personal property used in different

•

operation of the farm or other business.

The property is considered to have

businesses may be combined to meet

been acquired from or to have passed

The substitute time period for

the 50% and 25% requirements.

from the decedent under section

material participation for these

Qualified Real Property

1014(b) (relating to basis of property

decedents is a period totaling at least 5

acquired from a decedent);

years out of the 8-year period that

Qualified use. The term “qualified

•

The property is acquired by any

ended on the earlier of:

use” means the use of the property as

•

person from the estate; or

The date the decedent began

a farm for farming purposes or the use

•

The property is acquired by any

receiving social security benefits or

of property in a trade or business other

•

person from a trust, to the extent the

The date the decedent became

than farming. Trade or business applies

property is includible in the gross

disabled.

only to the active conduct of a

estate.

business. It does not apply to passive

Surviving spouse. A surviving

investment activities or the mere

Qualified heir. A person is a qualified

spouse who received qualified real

passive rental of property to a person

heir of property if he or she is a

property from the predeceased spouse

other than a member of the decedent’s

member of the decedent’s family and

is considered to have materially

family. Also, no trade or business is

acquired or received the property from

participated if he or she was engaged

present in the case of activities not

the decedent. If a qualified heir

in the active management of the farm

engaged in for profit.

disposes of any interest in qualified real

or other business. If the surviving

property to any member of his or her

spouse died within 8 years of the first

Ownership. To qualify as special-use

family, that person will then be treated

spouse’s death, you may add the

property, the decedent or a member of

as the qualified heir with respect to that

period of material participation of the

the decedent’s family must have owned

interest.

predeceased spouse to the period of

and used the property in a qualified use

active management by the surviving

The term “member of the family”

for 5 of the last 8 years before the

spouse to determine if the surviving

decedent’s death. Ownership may be

includes only:

•

spouse’s estate qualifies for special-use

direct or indirect through a corporation,

An ancestor (parent, grandparent,

valuation. To qualify for this, the

etc.) of the individual;

a partnership, or a trust.

•

property must have been eligible for

The spouse of the individual;

If the ownership is indirect, the

•

special-use valuation in the

The lineal descendant (child,

business must qualify as a closely held

predeceased spouse’s estate, though it

stepchild, grandchild, etc.) of the

business under section 6166. The

does not have to have been elected by

individual, the individual’s spouse, or a

ownership, when combined with

that estate.

parent of the individual; or

periods of direct ownership, must meet

•

The spouse, widow, or widower of

For additional details regarding

the requirements of section 6166 on the

any lineal descendant described above.

material participation, see Regulations

date of the decedent’s death and for a

A legally adopted child of an individual

section 20.2032A-3(e).

period of time that equals at least 5 of

is treated as a child of that individual by

the 8 years preceding death.

Valuation Methods

blood.

If the property was leased by the

The primary method of valuing

Material Participation

decedent to a closely held business, it

special-use value property that is used

qualifies as long as the business entity

To elect special-use valuation, either

for farming purposes is the annual

to which it was rented was a closely

the decedent or a member of his or her

gross cash rental method. If

held business with respect to the

family must have materially participated

comparable gross cash rentals are not

decedent on the date of the decedent’s

in the operation of the farm or other

available, you can substitute

death and for sufficient time to meet the

business for at least 5 of the 8 years

comparable average annual net share

“5 in 8 years” test explained beginning

ending on the date of the decedent’s

rentals. If neither of these are available,

on page 7.

death. The existence of material

or if you so elect, you can use the

-8-

Part Instructions

Instructions For Form 706 - United States Estate (And Generation-Skipping Transfer) Tax Return - 2008 Page 8

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