What Is Special Use Real Estate Valuation?

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 What is Real Estate Law?

Real estate law and property law includes a number of topics, such as:

  • Buying a home;
  • Selling a home;
  • Residential leases;
  • Commercial leases;
  • Commercial property purchases; or
  • Commercial property sales.

This is, of course, not an exhaustive list, but the most commonly encountered. Common disputes in real estate law and property law may include, but are not limited to:

  • Establishing property lines;
  • Establishing boundary lines;
  • Disputes between landlords and tenants; or
  • Zoning and usage issues.

Real estate and property laws also include the financing aspects of property, including liens, mortgages, and foreclosures. If an individual is considering purchasing or leasing a home or commercial building or land, it is essential to consult a real estate attorney in order to protect them from any unforeseen liabilities that may be attached to the property.

Real estate and property law may also overlap with estate planning laws. This can occur if real property is left to a beneficiary, or recipient, in a will or a trust.

What is a Property Valuation Conflict?

A property valuation is a process used to determine the value of a piece of property. It is also known as a property assessment. A property valuation usually takes place in connection with a purchase or sale of a residence.

A property valuation can be done by a private party, such as when a real estate company hires a property appraiser to evaluate the value of a home. A property appraiser is an individual who determines the value of a particular property. The appraisal is the process by which the appraiser sets the value of the property being evaluated using market values and other mechanisms.

A property valuation can also be done by a government agent. For example, when a county needs to determine the value of a home for tax purposes.

A property valuation conflict may occur when one or more of the parties involved disagree with the value of the property determined after the property appraisal. In many cases, the conflict arises between the homeowner and a property appraiser due to the home being valued either too high or too low compared to market prices. If not resolved, property valuation conflicts can delay or even prevent a real estate sale from being completed.

What is Special Use Real Estate Valuation?

Usually, real estate is valued at the amount that reflects the “highest and best use” for reasons related to the federal estate tax. The general rule is that the property’s fair market value (FMV) on the property owner’s date of death is the value that reflects the highest and best use.

In some cases, however, this type of valuation may yield unfair results. For example, if a family farm is located next to commercial real estate that is considered to be more valuable. In response to these cases of unfair results, the Internal Revenue Code permits certain real estate to be appraised at its “actual use” value instead of the “highest and best use” value. 

This actual use type of appraisal specifically applies to owners of farms or small businesses. There are certain requirements that must be met for these types of valuations.

What are Estate Taxes?

Estate taxes are those taxes that are owed and paid by an individual’s estate after they pass away. These taxes are imposed by the federal government. They are also known as death taxes or inheritance taxes. 

If assets or property are transferred to another individual upon the death of the owner, an estate tax may be imposed. The majority of estates will not owe any taxes, federal or state, because of their size. In general, estate taxes are only imposed when an estate is worth more than $11.58 million. Depending on the size of the estate, the tax rate can be up to 40%.

Are there State Estate Taxes?

Yes there are state estate taxes. In addition to federal estate taxes, some states collect an estate or inheritance tax. As of 2019, the following states collect estate taxes:

  • Iowa;
  • Kentucky;
  • Maryland;
  • Nebraska;
  • New Jersey; and
  • Pennsylvania.

Each of these states has different laws regarding exemptions from the inheritance taxes. In other words, certain individuals or estates may not be required to pay the estate tax, even in the states listed above. 

What are the Requirements for Special Use Valuation?

There are requirements that must be met in order to utilize the special use valuation for property. These include:

  • The net value of the property owned by the small business must be a minimum of 50% of the gross estate of the decedent, or individual who passed away;
  • The net value of real estate must be a minimum of 25% of the adjusted gross estate of the decedent;
  • The decedent must have bequeathed, or given, the business to a qualified heir or heirs; and
  • The small business must have been owned and operated by the decedent or a close relative of the family for 5 of the last 8 years prior to the decedent’s demise, disability, or retirement.

The gross estate is the value of an individual’s personal property, real property, or any other assets when they pass away. This includes property such as cash, investments, and personal belongings. The net value of the individual’s gross estate is the gross estate minus certain eligible deductions, including:

  • Debts;
  • Expenses;
  • Claims; or
  • Any other losses that are deductible.

In order to apply the special valuation, the heir or heirs who inherit the small business must be qualified. A qualified heir is a close family relative.

What is Considered a Small Business?

A small business is a business that is owned and operated privately with a relatively low volume of sales and a small number of employees. In the United States, standards for small businesses vary by state and by industry. Small businesses are becoming more common due to their ease of operation and certain tax deductions for small businesses that are available.

In general, a small business has less than 500 employees for manufacturing industries and less than a $7 million annual income for non-manufacturing industries. Small businesses often take the form of corporations, partnerships, or sole proprietorship.

What is the 10-Year Rule?

The 10-year rule states that an individual’s heirs may be unable to benefit from a special use valuation if, within 10 years of an individual’s demise, they sell or otherwise dispose of the property in some way other than transferring it to individuals who are not considered to be close family members. This rule may also apply if the heirs use the property for a different purpose within 10 years after the individual passes away.

Do I Need an Attorney for a Special Use Real Estate Valuation?

Yes, anytime you are involved in a real estate issue of any kind, it is important to seek the advice of an attorney. If you have a small business or farm that may be eligible for the special use real estate valuation, it is important to consult an real estate attorney. An attorney can determine whether or not your property or business qualifies. This can be extremely important to ensure your beneficiaries get the best value for any property you pass on to them.

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