Legal Definitions - special-use valuation

Special-use valuation is a method allowed under certain tax laws, primarily for federal estate tax purposes, that permits qualifying real property to be valued based on its actual current use rather than its "highest and best use" or fair market value. This provision is typically available for family farms and certain closely held businesses, aiming to prevent heirs from being forced to sell the property to pay estate taxes due to its potential development value. Essentially, it allows the property to be valued for what it is currently used for, rather than what it could be sold for on the open market if developed for its most profitable purpose.

• Example 1: A Generational Family Farm

  The Miller family has owned and operated a dairy farm for five generations on a large parcel of land located just outside a rapidly growing city. Due to urban expansion, the land's fair market value, if sold for residential development, would be extremely high, potentially millions of dollars. If the patriarch of the family passes away, the estate taxes calculated on this high market value could be so substantial that the heirs would be forced to sell the farm to pay them. Through special-use valuation, the farm could be valued based on its continued use as an agricultural operation, which would result in a significantly lower valuation and, consequently, lower estate taxes, allowing the family to keep the farm intact and continue their agricultural business.

• Example 2: A Historic Family Estate with a Nature Preserve

  The Chen family owns a vast estate that includes a historic manor house and several hundred acres of undeveloped woodland that they maintain as a private nature preserve, open to local researchers and school groups. This land is zoned for commercial development, and its market value reflects its potential for a large shopping center or industrial park. Upon the death of the estate's owner, the heirs could elect special-use valuation. This would allow the woodland portion of the estate to be valued based on its continued use as a nature preserve, rather than its much higher commercial development value. This significantly reduces the estate tax burden, making it feasible for the family to maintain the property's historic and ecological integrity.

• Example 3: A Family-Owned Manufacturing Business

  The Rodriguez family operates a small, specialized manufacturing business on a large industrial plot they've owned for decades. The property is located in an area that has recently become highly desirable for mixed-use commercial and residential development, making its fair market value for redevelopment purposes very high. If the head of the family passes away, the estate could face substantial taxes based on this high redevelopment value. By applying special-use valuation, the property could be valued based on its ongoing use as an industrial manufacturing site for the family business, rather than its potential as a lucrative commercial complex. This helps the family avoid selling the land and disrupting their business operations to cover estate tax liabilities.