The Treehouse And The Family Farm

Somewhere in the corner of the backyard, high in the branches of a sturdy oak tree, sits your childhood treehouse. The hand-cut 2x4s haphazardly perforated by crooked nails still emit an earthy fragrance reminiscent of freshly-cut grass, damp leaves, and summers long past. Sure, if you broke it down, those weathered planks might fetch a few dollars as reclaimed wood. A developer might see the site of the old oak tree as part of a lucrative plan for an expansive subdivision. But to your family, that treehouse is priceless—a repository of youthful memories, secret club meetings, and first kisses. Its true value isn’t in what it could become, but in what it is. This is precisely the philosophy behind Section 2032A of the Internal Revenue Code, affectionately known as the special use valuation election.

Your family values that treehouse for its actual use rather than its theoretical “highest and best” value, and accordingly, under Section 2032A, the IRS allows families to value their farms and closely-held businesses based on their current agricultural or business use rather than their potential development value when calculating the gross estate of the deceased owner.

Under typical circumstances, the IRS will ascribe value to an asset based on its potential or “highest and best” use. Consider a family farm nestled on the outskirts of a rapidly expanding suburb. To a developer’s calculating eyes, those fertile fields might look like the perfect canvas for the next strip mall or luxury housing development. And normally the IRS would agree, but Section 2032A provides the family with recourse.

Requirements For Special Use Valuation

Under 2032A, if your family meets certain requirements (think of them as the “treehouse club rules”), you can value the property based on its current use as farmland rather than its potential development value. The difference can be staggering. To qualify for 2032A:

• Qualified Real Property. First, the property must be actively used for farming or in a closely-held business. The decedent must be a United States citizen or resident at the time of death and the real property must be located in the United States.
• Qualified Heir. The property must pass to a qualified heir. A qualified heir includes the spouse of the decedent, an ancestor (such as a parent or grandparent), a lineal descendant (such as a child, stepchild, or grandchild), or the spouse of a lineal descendant.
• Qualified Use. The property must have been used for a qualified use by the decedent or family member for five of the last eight years before death (i.e., the property must have been used as a farm for farming purposes or the property must have been used in an active trade or business other than farming).
• Material Participation. The property must have been “materially participated in” by the decedent or family member for five of the last eight years. There is no silver bullet to meeting the material purpose requirement, but generally speaking, material participation is more than the passive collection of rent, salaries, or other income; it includes actions such as making important management decisions and carrying out physical work.
• Adjusted Value. The adjusted value of the real and personal property used as a farm or business must be at least 50% of the adjusted gross estate and the adjusted value of the qualified real property must be at least 25% of the adjusted value of the gross estate (ensuring that this special valuation applies to genuine family operations rather than hobby farms).

The reward for meeting these requirements? In 2025, 2032A can reduce the estate tax value of qualified real property by up to $1.42 million. But beware—like a treehouse with a “Keep Out” sign, Section 2032A comes with restrictions. The qualified heir must continue the qualifying use for 10 years after the decedent’s death. If they don’t, they’ll face a recapture tax.

The election itself requires careful consideration. It’s irrevocable—like that time you carved your crush’s initials into the treehouse wall. The property must be specifically identified, and all parties with any interest in the property must sign an agreement to be personally liable for any recapture tax.

Agricultural land increasingly faces development pressure, thus the special use valuation under Section 2032A helps ensure that family farms can be passed down to the next generation without crippling estate tax burdens. In the end, Section 2032A recognizes that some things are worth more than their potential conversion value—that rickety treehouse represents family bonds and cherished memories rather than mere lumber and nails, and the family farm and business represents more than just real estate waiting to be developed.