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Last Updated: 6/20/2013

Qualified small business property and qualified farm property

Qualified Small Business Property and Farm Property

How much, if any, of personal farm property can qualify as part of the qualified small business property deduction or qualified farm property deduction?
Only agricultural land and attached buildings (real property) can meet the requirements to be deducted as qualified farm property. Personal property used in farming, like machinery or crops, cannot be deducted as qualified farm property. On the other hand, personal farm property may be deducted if it meets the requirements for qualified small business property.

If the decedent died owning a life estate interest, can the property meet the requirements for qualified small business property or qualified farm property?
If the value of the property is includable in the gross estate due to section 2036 of the Internal Revenue Code, the property may qualify for the qualified small business property or qualified farm property deduction if the value of the property is also included in the federal adjusted taxable estate and all other requirements are met, including that the property was continuously owned by the decedent for a three-year period prior to death and the property was transferred from the decedent to a qualified heir.

If decedent’s adjusted taxable estate includes $4.5 million in qualified property and an additional $400,000 of personal assets, can the estate deduct $4 million as qualified property and exclude the remaining $900,000 using the $1 million applicable exclusion amount?
Yes, the decedent can deduct $4 million as qualified property. After deducting $4 million, decedent’s adjusted taxable estate will be $900,000. Because $900,000 is less than the applicable exclusion amount of $1 million, there is no Minnesota estate tax liability.

If the property meets the requirements for both qualified small business property and qualified farm property, could the estate choose to deduct the property under one or the other depending on which tax benefits are better?
Only agricultural land could meet the requirements of both qualified small business property and qualified farm property. Even so, both types of property, so long as all the necessary requirements are met, result in the same deduction from the Minnesota taxable estate.

 

Qualified Small Business Property

What is “material participation”?
Material participation is defined in section 469 of the Internal Revenue Code. It generally requires “regular, continuous, and substantial” involvement in the operations of a trade or business activity. A passive activity – as defined in section 469(c) – does not constitute material participation.

What is a cash equivalent?
Cash equivalents are short-term securities that can be quickly sold or exchanged for cash. Examples include negotiable instruments, money market holdings, short-term government bonds or Treasury bills, marketable securities, and commercial paper.
Note: The value of cash and cash equivalents is not included in the value of qualified small business property.

What are “assets not used in the operation of the trade or business”?
These are assets used mainly for personal reasons. Examples include investments, personal cars, family cabin, etc.
Note: The value of assets not used in the operation of the trade or business is not included in the value of qualified small business property.

 

Qualified Farm Property

How can an estate determine if agricultural land meets the requirements of Minnesota Statutes, section 500.24?
In general, state law prohibits the following from farming, owning, or leasing farmland in Minnesota: corporations, limited liability companies, pension or investment funds, trusts, and limited partnerships. To receive the qualified farm property deduction, the land cannot be owned by an entity that is prohibited from owning agricultural land under section 500.24 of Minnesota Statutes.

How can an estate determine if the property is classified as class 2a agricultural land?
Refer to the property tax statement for taxes payable in the decedent’s year of death.

How can an estate determine if the property is classified as a homestead under Minnesota law?
Refer to the property tax statement for taxes payable in the decedent’s year of death.

What is “special agricultural homestead”?
The Special Agricultural Homestead provision extends homestead status to:

  • Property owners who do not live on their farm but actively farm their land; or who have a spouse, sibling, child, grandchild, or parent who actively farms the land.
  • Farms owned or leased by a qualified entity and farmed by a member of the entity who does not live on the farm.
  • Property that is owned under a trust and farmed by a grantor, grantor’s spouse, or the grantor’s child, sibling, grandchild, or parent.

For more information, see Property Tax Fact Sheets 4A, 4B, and 4C.