The IRS today posted Revenue Ruling 2012-26 which lists the applicable interest rates (go to page 3 of release for the actual ruling) available if an estate elects Special Use Valuation in valuing farmland. Special Use Valuation allows an estate comprised primarily of farmland (or other qualified business property) to elect to value the farmland by capitalizing the net cash rent income generated by the farmland.
In brief, you take the average of gross cash rent income for the last five years, subtract the related average property taxes for this period and divide by the applicable interest for the year of death. Since these interest rates have decreased dramatically over the last several years, the potential savings from this election may have diminished.
For example, assume the net average cash rent for Iowa farmland has been $200, $225, $250, $300 and $350 for the last five years. The average gross rent is $265. Assume average property taxes have been $10. The resulting net rent of $255 would be divided by the applicable interest rate using the table provided by the IRS in Rev. Rul. 2012-26. Iowa is served the AgriBank, FCB and this interest rate for 2012 is 5.61%. After dividing by this number, we get a special use valuation of about $4,545 per acre. If the appraised fair market value of the farmland is greater than $4,545, the estate may save estate taxes by using this lower amount. The proper amount of cash rent, etc. can get very technical, so these elections must be done by an experienced preparer. This example is for illustrative purposes only.
The IRS has reduced the number of reporting FCB districts from five to four by dropping U.S. AgBank, FCB. The four districts left are AgFirst, AgriBank, CoBank and Texas. All 50 states plus the District of Columbia will fall into one of these four districts. The lowest interest rate for 2012 is CoBank at 5.15% and the highest is AgFirst at 6.19%.
If Special Use Valuation is applicable, up to slightly more than $1 million in farm land value can be deducted from the estate. Up to about $350,000 in estate tax savings can result.