Impact of Section 2032A on land alienation and values

The ∮2032A use valuation provision of the 1976 Tax Reform Act will have an impact on the agricultural sector. The objectives of this research were to set forth the requirements for compliance with ∮2032A, estimate potential tax liabilities for selected estate situations using various rates of asset appreciation, and determine the potential impact of ∮2032A upon farm real estate alienation and prices.

Data were obtained from U.S.D.A. publications, the Internal Revenue Code, Treasury regulations, and various other publications relating to interpretation of ∮2032A and its application.

From projected 1980 estate tax liabilities, estate tax savings from election of ∮2032A were calculated. For Sales Classification IA, $100,000 of gross sales and over, estate tax savings were $63,188 for those estates being able to utilize a marital deduction, and $143,098 for those estates having no marital deduction. Smaller tax savings resulted from election of ∮2032A for those farms in lower sales classifications. The $500,000 adjusted gross estate reduction limitation takes effect when the gross estate is $1,930,501, real assets are $1,428,571, and debt is $308,880, assuming the land use value is 65 percent. Tax savings from election of ∮2032A in such a case would be $93,716 for those estates where a marital deduction can be utilized, and $214,864 where a marital deduction cannot be utilized.

The election of ∮2032A has the potential to reduce the short-term supply of land in the real estate market by 1 percent per year. Price increases of farmland around urban areas may be complicated by ∮2032A because of its attractiveness in terms of investment potential and low use values due to a combination of low cash rental rates, ease of material participation, and high rates of taxation.