The decedent or a member of the decedent's family must have been actively involved in the farm or ranch business during 5 or more of the last 8 years before the earlier of the decedent's retirement, disability, or death. The real estate must have been owned by the decedent or a member of the family and held for a qualified use during 5 or more years in the 8-year period ending with the decedent's death. An estate in which a special use valuation election is made is subjected to a 10-year period during which no eligibility rule can be violated or the estate will have to pay back all the tax benefits. The following are some of the possibilities and consequences of post-death recapture. Recapture occurs if the qualified heir does not materially participate for more than 3 years in any 8-year period that ends after death.
Recapture is triggered if there is a change in use of the elected property.
The qualified use test must be satisfied for the entire length of the recapture period, except for a 2-year grace period immediately following death. If recapture tax is triggered, the amount recaptured is the difference between what the estate would have paid without the election and what it paid with the election. An IRS lien is imposed on all qualified farm or closely held business real property for which a special use value election has been made. The lien arises at the time the election is filed and continues until the potential liability for recapture ceases, the qualified heir dies, or the tax benefit is recaptured. If an individual makes a gift of property, but keeps some powers over the property, those retained powers will pull the property back into the donor's estate.