Your Cottage and keeping it in the family

Ahh, your cottage – a place of sanctuary, family fun and warm memories. But passing along a cottage to the next generation can set off complex financial and family issues. Here are some suggested steps to ensuring cottage continuity.

Know what your kids want You know that cottage ownership is a big personal and financial responsibility that is not for everyone. Discuss this with your children and if any of them are not interested in inheriting the cottage, avoid family squabbles by making sure they are treated fairly in your will.

If you decide on shared ownership, keep in mind that it can be a difficult proposition. That’s why it can be useful to obtain legal advice when you put an agreement in place – about such things as who uses the cottage and when, who pays for repairs, maintenance and upkeep, and the other nitty-gritty aspects of joint cottage ownership – to avoid protracted disputes and misunderstandings.

Manage the tax burden If your cottage has appreciated in value, your estate can face a significant capital gains liability that could force its sale by your heirs.

Capital gains taxes are based on the difference between the cost of your property and its current fair market value at the time of your death. The cost of your cottage is what you initially paid for it plus the value of any capital improvements you made to it over the years – a new deck or roof, for example, including the cost of anyone you hired to do the work for you – so keep your receipts to account for all these costs to help offset capital gains. General upkeep costs such as painting the cottage are generally not considered capital improvements.

Consider taking advantage of the primary residence exemption. You are allowed to name a primary residence that is exempt from tax on capital gain. The residence must be a property you ‘ordinarily inhabited’. It can be either your city home or your cottage. You are allowed just one principal residence at a time but you can choose to exempt the property with the bigger gain.

Have a succession plan Include an effective strategy for passing on your cottage. One option is to purchase life insurance with tax-free death benefits that will cover the capital gains on your cottage and/or other expenses and avoid the forced sale of estate assets. Life insurance is also a good way to equalize an estate where one child wants to keep the cottage, whereas other children would prefer to sell it and divide the proceeds of sale.

Some of these estate planning options may not work in your situation, so it’s a good idea to talk to your professional advisor about your wishes for your cottage and the financial and estate planning options that will work best for you.

John Scholl B. Mathematics, CGA,

Consultant - Investors Group Financial Services Inc.

Wealth Management & Financial Planning

Phone: (905) 450-2891 Toll Free: 1 (866) 799-2223 Cell (416) 731-3660

Thinking about Handing over the Cottage?

 Thinking about handing over the cottage? It could be less ‘taxing’ these days

Your vacation property has always been a prime place for family fun and enjoyment. And you want it to continue to be your family’s happy gathering place for many years to come – even after you are gone. If you’re considering ways to make the transfer to your children, this current economic downturn could actually be to your advantage – your tax advantage, that is.

When you die, your assets can usually be passed to your spouse or common-law partner without incurring a tax liability. But if you leave capital assets – such as your cottage – to anyone else, including your kids, you’re deemed to have disposed of those capital assets at fair market value. If your cottage property has appreciated in value, your estate could be hit with a significant capital gains liability.

If you leave your cottage to your children in your will, you have no way of knowing how much of a tax hit they’ll take – maybe a big enough hit that they won’t be able to afford to continue owning the cottage.

While real estate values are ebbing right now, it may not be an entirely bad thing. Real estate prices may rebound in the future – historically, that has been the case. Instead of leaving the property as a bequest in your will, you can transfer cottage ownership to your kids now, either as an outright gift or by selling it to them. The transfer will trigger an immediate capital gain but the property will be valued at the current reduced market level, which could save a significant amount of tax.

If you are going to sell the property to your children, be sure to sell it to them for fair market value. When you transfer a property to a close family member, you will be deemed to have received fair market value even if you actually receive much less than that on the sale, meaning that you will still have to pay tax on the capital gain regardless of whether or not you have received any cash. Also, selling a property for less than fair market value can actually result in some double taxation, so speak to your tax specialist before transferring the property. If you want to spread out the capital gains tax (and make the payments more manageable for your children), consider making the payments payable over a 5 year period and claiming the capital gains reserve, so that only 20% of the capital gain is taxable in any one year.

If you are more comfortable with leaving the property to your kids in your will, one good way to alleviate the inevitable capital gains tax hit is with permanent life insurance. The death benefits are usually tax-free and can be used to cover capital gains and/or any other estate taxes – so your executor won’t be forced to sell your cottage or any other assets to pay taxes.

Your family cottage is an important part of your life. Make it an important part of your overall financial plan, too. Your professional advisor can help you make the right choices for your personal situation.

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments. Contact a financial advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.

John Scholl   B. Mathematics, CGA, Wealth Management & Financial Planning 

 (905) 450-2891 X529   Cell:   (416) 731-3660   john.scholl@investorsgroup.com