Student Question from Greg C
Course: Income Tax Planning
Is the recapture full or is it prorated? I looked at Section 2032A and couldn’t quickly tell although it does not appear to be prorated. That is a complex Code section and the slide appears to do a nice job of distilling it down to the basics we should know. Thanks, Greg
Sometimes the “highest and best use” is not the most appropriate valuation for estate tax purposes. For property that qualifies for 2032A treatment, the IRS allows a valuation based on “current use” as opposed to “highest and best.”
The estate runs the risk of “recapture” if the property is sold out of the family within 10 years of date of death or if there is no material participation in the farm or business by a qualified heir. By recapture, we mean the additional estate tax that was “saved” due to the application of 2032A is recaptured and imposed on the heirs if the conditions have not been met. In other words, the IRS essentially has a lien on the property during this time frame. Note that there is no recapture if there is an involuntary conversion of the farm or business. An example of involuntary conversion would be the state putting a highway through a farm, forcing the sale of the real estate.
So, there’s no proration with respect to time. The real property may not be transferred to anyone other than a qualified heir within 10 years after date of death. However, if only 10% of the real property is transferred to someone other than a qualified heir, then the recapture is assessed only on the non-qualifying disposition of the property. A non-qualifying disposition includes not only transfer to a non-qualified heir, but also to failure of the qualified heir to meeting material participation rules.
Very unlikely this would ever be tested on the CFP Board Exam, in our opinion. Thanks for the question!