Monthly Archives: May 2022
The IRS provides a safe harbor for exchanging a vacation home (defined as “dwelling unit” in the Rev. Proc.). This ruling provides clear guidance of the circumstances under which the IRS will not challenge whether a vacation home will qualify as property “held for investment” under §1031.
Exchanging a Vacation Home as Relinquished Property
For a vacation home to qualify as relinquished property, it must meet the following criteria:
• It is owned by the taxpayer for at least 24 months immediately before the exchange (“qualifying use period”); and
• Within the qualifying use period, in each of the two 12 month periods, (1) the taxpayer rents the dwelling unit at fair rental to an other person for 14 days or more and (2) the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12 month period that the dwelling unit was rented at fair rental value.
The first 12 month period immediately preceding the exchange ends on the day before the exchange takes place (and begins 12 months prior to that day). The second 12 month period ends on the day before the first 12 month period begins (and begins 12 months prior to that day).
Exchanging a Vacation Home as Replacement Property
For a vacation home to qualify as replacement property, it must meet the following criteria:
• It is owned by the taxpayer for at least 24 months immediately following the exchange (“qualifying use period”); and
• Within the qualifying use period, in each of the two 12 month periods, (1) the taxpayer rents the dwelling unit to another person at fair rental for 14 days or more and (2) the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12 month period that the dwelling unit was rented at fair rental.
The 12 month period immediately after the exchange begins on the day after the exchange takes place and the second 12 month period begins on the day after the first 12 month period ends.
Personal use is defined broadly. Use by the taxpayer or other person having an interest in the dwelling unit and any family member* will be considered “personal use” by the taxpayer. Also, any arrangement whereby fair market rent is not paid will be considered “personal use” by the taxpayer. Notwithstanding the foregoing, use by family members will not be considered “personal use” by the taxpayer only if the dwelling unit is rented at fair market rent and the family member uses it as his principal residence.
Fair rental is based upon all of the facts and circumstances that exist when the rental agreement is entered into. All rights and obligations of the rental agreement are taken into account.
Note special rule for replacement property. If the taxpayer files a return reporting a transaction under §1031 based on the expectation that the dwelling unit will meet the qualifying use standards and subsequently determines that the dwelling unit does not meet the qualifying use standards, the taxpayer, if necessary, should file an amended return.
Exchanges of vacation homes outside the Rev. Proc. 2008-16 safe harbor. An exchange of a vacation home may still qualify under §1031even though it falls outside the parameters of Rev. Proc. 2008-16. Any such circumstance will be subject to greater scrutiny and therefore should be carefully planned and reviewed by the taxpayer’s tax advisor.
*Brothers and sisters (by the whole or half blood), spouses, ancestors, and lineal descendants.
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Article originally posted on Costar
In another sign of the strength of the U.S. consumer and the resiliency of brick-and-mortar retail, in-store retail sales per square foot rose to records across most major categories in the first quarter, according to data compiled by Datex Property Solutions and reported by the International Council of Shopping Centers, or ICSC.
The measure, long the gold standard for evaluating the operating performance of physical retail space, comes as ICSC begins its annual trade show in Las Vegas Monday in an environment in which the pandemic appears to be easing.
For the 12-month period ending March 2022, 12 of 19 retail categories reported a record level of sales per square foot. Categories seeing the greatest uptick include fast food, beauty supplies, specialty food and specialty retail, which is a category that includes retailers focused on a specific retail vertical, such as books, party supplies, backpacking or devices. Of the seven categories not sitting at record levels, six remain below 2019 sales figures, while one, craft retailers, is above its 2019 sales level but below the elevated sales recorded in 2020, during the height of the pandemic.
Retail sales per square foot is simply a store’s average revenue for each foot of sales space. For example, if a store with 5,000 square feet of sales area sold $3 million of goods during a year, its sales per square foot would be $600.
Sales per square foot vary across retailers and categories and are used to analyze the sales performance of a location and compare it to portfolio-wide or industry benchmarks. In addition, when combined with rent expense, sales per square foot data can be used to determine a location’s occupancy cost, or its rent expense relative to the sales generated at a store.
Simply put, as a retailer’s sales per square foot increase, its overall occupancy cost declines. Once that cost drops below a certain threshold, it indicates a store location is performing so well that it can likely afford a higher rent without severely affecting profitability.
With that relationship in mind, the higher level of sales per square foot recorded across many retail categories, coupled with tightening space availability and increased leasing activity in primary shopping corridors across the U.S., is beginning to give retail landlords pricing power for the first time in years.
This is further demonstrated by the increase in retail asking rents over the past 12 months, which have accelerated at their quickest pace in over a decade. Assuming retail sales per square foot continue to rise, we expect additional rental increases are on the horizon, at least for the top-performing retail centers, as sale conditions can vary widely from location to location.