[Code of Federal Regulations]
[Title 26, Volume 14]
[Revised as of January 1, 2007]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR20.2032A-4]

[Page 300-302]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 20_ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16, 
1954--Table of Contents
 
Sec.  20.2032A-4  Method of valuing farm real property.

    (a) In general. Unless the executor of the decedent's estate elects 
otherwise under section 2032A(e)(7)(B)(ii) or fails to document 
comparable rented farm property meeting the requirements of this 
section, the value of the property which is used for farming purposes 
and which is subject to an election under section 2032A is determined 
by--
    (1) Subtracting the average annual state and local real estate taxes 
on actual tracts of comparable real property in the same locality from 
the average annual gross cash rental for that same comparable property, 
and
    (2) Dividing the result so obtained by the average annual effective 
interest rate charged on new Federal land bank loans.

The computation of each average annual amount is to be based on the 5 
most recent calendar years ending before the date of the decedent's 
death.
    (b) Gross cash rental--(1) Generally. Gross cash rental is the total 
amount of cash received for the use of actual tracts of comparable farm 
real property in the same locality as the property being specially 
valued during the period of one calendar year. This amount is not 
diminished by the amount of any expenses or liabilities associated with 
the farm operation or the lease. See, paragraph (d) of this section for 
a definition of comparable property and rules for property on which 
buildings or other improvements are located and farms including multiple 
property types. Only rentals from tracts of comparable farm property 
which are rented solely for an amount of cash which is not contingent 
upon production are acceptable for use in valuing real property under 
section 2032A (e) (7). The rentals considered must result from an arm's-
length transaction as defined in this section. Additionally, rentals 
received under leases which provide for payment solely in cash are not 
acceptable as accurate measures of cash rental value if involvement by 
the lessor (or a member of the lessor's family who is other than a 
lessee) in the management or operation of the farm to an extent which 
amounts to material participation under the rules of section 2032A is 
contemplated or actually occurs. In general, therefore, rentals for any 
property which qualifies for special use valuation cannot be used to 
compute gross cash rentals under this section because the total amount 
received by the lessor does not reflect the true cash rental value of 
the real property.
    (2) Special rules--(i) Documentation required of executor. The 
executor must identify to the Internal Revenue Service actual comparable 
property for all specially valued property and cash rentals from that 
property if the decedent's real property is valued under section 
2032A(e)(7). If the executor does not identify such property and cash 
rentals, all specially valued real property must be valued under the 
rules of section 2032A(e)(8) if special use valuation has been elected. 
See, however, Sec.  20.2032A-8(d) for a special rule for estates 
electing section 2032A treatment on or before August 30, 1980.
    (ii) Arm's-length transaction required. Only those cash rentals 
which result from a lease entered into in an arm's-length transaction 
are acceptable under section 2032A(e)(7). For these purposes, lands 
leased from the Federal government, or any state or local government, 
which are leased for less than the amount that would be demanded by a 
private individual leasing for profit are not leased in an arm's-length 
transaction. Additionally, leases between family members (as defined in 
section 2032A(e)(2)) which do not provide a return on the property 
commensurate with that received under leases between unrelated parties 
in the locality are not acceptable under this section.
    (iii) In-kind rents, statements of appraised rental value, and area 
averages. Rents which are paid wholly or partly in kind (e.g., crop 
shares) may not be used to determine the value of real property under 
section 2032A(e)(7). Likewise, appraisals or other statements regarding 
rental value as well as area-wide averages of rentals (i.e., those 
compiled by the United States Department of Agriculture) may not be used 
under section 2032A(e)(7) because they are not true measures of the 
actual cash rental value of comparable property in the same locality as 
the specially valued property.

[[Page 301]]

    (iv) Period for which comparable real property must have been rented 
solely for cash. Comparable real property rented solely for cash must be 
identified for each of the five calendar years preceding the year of the 
decedent's death if section 2032A(e)(7) is used to value the decedent's 
real property. Rentals from the same tract of comparable property need 
not be used for each of these 5 years, however, provided an actual tract 
of property meeting the requirements of this section is identified for 
each year.
    (v) Leases under which rental of personal property is included. No 
adjustment to the rents actually received by the lessor is made for the 
use of any farm equipment or other personal property the use of which is 
included under a lease for comparable real property unless the lease 
specifies the amount of the total rental attributable to the personal 
property and that amount is reasonable under the circumstances.
    (c) State and local real estate taxes. For purposes of the farm 
valuation formula under section 2032A(e)(7) state and local taxes are 
taxes which are assessed by a state or local government and which are 
allowable deductions under section 164. However, only those taxes on the 
comparable real property from which cash rentals are determined may be 
used in the formula valuation.
    (d) Comparable real property defined. Comparable real property must 
be situated in the same locality as the specially valued property. This 
requirement is not to be viewed in terms of mileage or political 
divisions alone, but rather is to be judged according to generally 
accepted real property valuation rules. The determination of properties 
which are comparable is a factual one and must be based on numerous 
factors, no one of which is determinative. It will, therefore, 
frequently be necessary to value farm property in segments where there 
are different uses or land characteristics included in the specially 
valued farm. For example, if section 2032A(e)(7) is used, rented 
property on which comparable buildings or improvements are located must 
be identified for specially valued property on which buildings or other 
real property improvements are located. In cases involving multiple 
areas or land characteristics, actual comparable property for each 
segment must be used, and the rentals and taxes from all such properties 
combined (using generally accepted real property valuation rules) for 
use in the valuation formula given in this section. However, any premium 
or discount resulting from the presence of multiple uses or other 
characteristics in one farm is also to be reflected. All factors 
generally considered in real estate valuation are to be considered in 
determining comparability under section 2032A. While not intended as an 
exclusive list, the following factors are among those to be considered 
in determining comparability--
    (1) Similarity of soil as determined by any objective means, 
including an official soil survey reflected in a soil productivity 
index;
    (2) Whether the crops grown are such as would deplete the soil in a 
similar manner;
    (3) The types of soil conservation techniques that have been 
practiced on the two properties;
    (4) Whether the two properties are subject to flooding;
    (5) The slope of the land;
    (6) In the case of livestock operations, the carrying capacity of 
the land;
    (7) Where the land is timbered, whether the timber is comparable to 
that on the subject property;
    (8) Whether the property as a whole is unified or whether it is 
segmented, and where segmented, the availability of the means necessary 
for movement among the different segments;
    (9) The number, types, and conditions of all buildings and other 
fixed improvements located on the properties and their location as it 
affects efficient management and use of property and value per se; and
    (10) Availability of, and type of, transportation facilities in 
terms of costs and of proximity of the properties to local markets.
    (e) Effective interest rate defined--(1) Generally. The annual 
effective interest rate on new Federal land bank loans is the average 
billing rate charged on new agricultural loans to farmers and ranchers 
in the farm credit district in which the real property to be valued

[[Page 302]]

under section 2032A is located, adjusted as provided in paragraph (e)(2) 
of this section. This rate is to be a single rate for each district 
covering the period of one calendar year and is to be computed to the 
nearest one-hundredth of one percent. In the event that the district 
billing rates of interest on such new agricultural loans change during a 
year, the rate for that year is to be weighted to reflect the portion of 
the year during which each such rate was charged. If a district's 
billing rate on such new agricultural loans varies according to the 
amount of the loan, the rate applicable to a loan in an amount resulting 
from dividing the total dollar amount of such loans closed during the 
year by the total number of the loans closed is to be used under section 
2032A. Applicable rates may be obtained from the district director of 
internal revenue.
    (2) Adjustment to billing rate of interest. The billing rate of 
interest determined under this paragraph is to be adjusted to reflect 
the increased cost of borrowing resulting from the required purchase of 
land bank association stock. For section 2032A purposes, the rate of 
required stock investment is the average of the percentages of the face 
amount of new agricultural loans to farmers and ranchers required to be 
invested in such stock by the applicable district bank during the year. 
If this percentage changes during a year, the average is to be adjusted 
to reflect the period when each percentage requirement was effective. 
The percentage is viewed as a reduction in the loan proceeds actually 
received from the amount upon which interest is charged.
    (3) Example. The determination of the effective interest rate for 
any year may be illustrated as follows:

    Example. District X of the Federal land bank system charged an 8 
percent billed interest rate on new agricultural loans for 8 months of 
the year, 1976, and an 8.75 percent rate for 4 months of the year. The 
average billing rate was, therefore, 8.25 percent [(1.08 x 8/12) + 
(1.0875 x 4/12)=1.0825]. The district required stock equal to 5 percent 
of the face amount of the loan to be purchased as a precondition to 
receiving a loan. Thus, the borrower only received 95 percent of the 
funds upon which he paid interest. The applicable annual interest rate 
for 1976 of 8.68 percent is computed as follows:

8.25 percent x 1.00 (total loan amount)=8.25 percent (billed interest 
rate) divided by 0.95 (percent of loan proceeds received by borrower) = 
8.68 percent (effective interest rate for 1976).

[T.D. 7710, 45 FR 50742, July 31, 1980]