In Part 3 of Form 706, the estate administrator can choose to make any of four tax elections depending on if these elections apply to the decedent and benefit the estate. The first two elections, alternate valuation and special use valuation, use alternative valuations of estate property to lower estate taxes. Both elections allow estate property to be valued at a lower amount than the fair market, date-of-death value.
Alternate valuation: Valuing depreciated property
Alternate valuation, which you elect on line 1, Part 3 of Form 706, allows you to value the property of the estate as of six months after the date of death rather than on the date of death. This protects the estate from paying tax on the date-of-death value of the assets if the estate’s total value has dropped steeply six months after death.
If elected, alternate valuation applies to all assets and is not revocable. You can elect it only on the return as originally filed, and only if it decreases both the gross estate and the total of the estate and GST taxes. You must still show every asset’s date-of-death value even if you elect alternate valuation. The following are examples of how to determine alternate valuations:
Property distributed, sold, exchanged, or disposed of in any other way within six months after the date of death: Value it as of the date of distribution, sale, or other disposition.
Property still in the decedent’s estate as of six months after the date of death: Value it as of that six month date. If no date in that sixth month corresponds to the decedent’s date of death, use the last day of the sixth month.
Property that changes value due to the mere lapse of time: Value it as of the date of death or as of the date it’s distributed, sold, exchanged, or otherwise disposed of.
If you elect alternate valuation, don’t include increases or decreases from either the date-of-death value or the alternate value that are due entirely to the lapse of time.
For example, at the date of death, a bond is worth the market value of the bond plus the value of accrued interest owed to the bondholder (the decedent) at that date. With alternate valuation, only the market value of the bond changes to the value six months after death. The accrued interest on the bond remains the same as it was on the date of death.
Special use real estate valuation
The special use valuation election allows you to value real estate at its actual use rather than its best use under certain circumstances.
Section 2032A of the Internal Revenue Code allows you to value the decedent’s real property that was used in the operation of a family farm or closely held business at its farm or business use rather than at its higher fair market value.
You also have the option of electing both alternate valuation and special use valuation with regard to the property. Discuss this election with a qualified tax preparer to see if your real estate qualifies. Not meeting any one condition can invalidate the election.