Building your Financial
Success
With Alain Aube
Financial Rewards
Your cottage and
you - a practical view of an emotional investment
Happy times with family and friends, building memories that last a
lifetime - that's the allure of the cottage for most Canadians. But with
all the warm sentiments surrounding your vacation property, it's often
difficult to think about ownership issues in practical terms. You
should, though, because poor estate planning or other unforeseen events
could rob you or your family of the cottage life you enjoy so much. Here
are a few things you should consider now to help ensure it's always
family time at your cottage.
Is a cottage a wise investment? You can buy a vacation home today for
investment purposes as well as enjoyment. Buying a cottage may not be
cheap, but if it's in a desirable location - on a waterfront, for
instance - your equity is likely to grow in value over the years. There
may also be certain tax benefits. If you rent out the cottage at certain
times, a portion of the interest, property taxes and depreciation can be
deducted from the rental income that you report.
If you plan to use your cottage as your permanent retirement home later,
you can aim for a mortgage-free retirement by getting ahead on your
payments during your earning years or using the equity in your 'city'
home to pay out your cottage mortgage at retirement.
Are there tax implications I should know about? Yes. Unless you're
passing assets to your spouse, when you die you're deemed to have
disposed of all your capital assets at fair market value. If your
vacation property has appreciated in value, there could be a significant
capital gains tax liability. You are allowed to claim a principal
residence exemption, but that exemption usually applies to only one
property - so if you choose to use it on your 'city' home, the gain on
your vacation home might be subject to tax.
One good way to cover these taxes - and any other estate debts, as well
- is through a permanent insurance plan providing tax-free benefits that
can be used to cover your estate's tax bill.
Should I consider any other types of insurance? Absolutely. If you
become ill or disabled, the resulting cash crunch could force your
family to sell assets - including your vacation home. At times of
crisis, it's difficult to make the right financial decisions. You can
avoid these cottage conundrums by obtaining an appropriate amount of
disability, critical illness and/or long-term care insurance. And, as
cottage prices rise and your equity increases, it's also a good idea to
revise your vacation property insurance from time to time.
How should I pass the cottage on to the kids? Leaving it to them in your
will triggers tax consequences when you die. An alternative is to
transfer some or all of the property ownership to them during your
lifetime - either as a gift or through joint ownership (with or without
you as a joint owner). You could also transfer the property to a trust,
with your children as beneficiaries. Each of these transfer options does
trigger a capital gain when the transfer is made, however, any future
capital gains on the property will accrue to your children and are not
payable until they sell or transfer the property.
Cottage life is terrific in so many ways. Keep it that way for you and
your family by discussing all your personal and estate financial
planning options with your tax, legal and financial advisors.
