Your cottage is an amazing place where some of your family’s best memories were made. If you’re starting to think of your retirement, getting older, or you just don’t want the work that comes with owning a cottage, you may be contemplating your options to pass it down and keep it in the family for generations to come. There is no single solution to transfer your cottage ownership; it all depends on you, your financial situation and your family’s needs and wants. Let’s look at some key pieces of information that will help you make a more informed decision:
What does your family want?
Do your kids and/or grandkids want to own and manage the cottage? They may be great guests, but do they understand what’s involved with the upkeep, bills and by-laws? The only way to find out is to have a talk, explain your goals, and go from there. You may discover that they aren’t as keen on keeping it as you thought. If that’s the case, you can sell it now or you can continue to enjoy it, maybe rent it out, or revisit your options in a few years.
Capital gains taxes
The transfer or sale of a second or vacation property means that capital gains taxes must be paid if it has increased in value since your purchase, which is the most likely scenario. In Parry Sound and Muskoka, there are very few cottage properties that haven’t seen profits (often massive ones) over the past few decades. The capital gains tax is the tax portion on the difference between the purchase price and current market value, minus any upgrades you’ve made to the property. These tax amounts can vary widely but typically range between $50,000 – $200,000 and up.
Researching your options
If everyone’s on board to keep the family cottage, it’s important to know your options and the financial/tax implications. While it’s not possible to completely avoid paying capital gains taxes on the property sale or transfer (either now or in the future), there are a few ways to reduce or delay the hefty tax bill. For example, you can make your cottage your principal residence (but then your primary family residence will be subject to capital gains taxes, so you’d want to choose the lesser amount of the two).
Another option is to legally transfer the cottage to your children now and either pay the taxes yourself or come up with a financial plan for them to chip in and contribute. You can also consider the “capital gains reserve”, which lets you extend the reporting period for up to five years (and save a bit of money during that time). This is only allowed if the cottage has been sold and not gifted, and other regulations apply as well.
You can also decide to stick with the status quo, meaning the cottage stays in your name and when you pass away, it can be left to your family to decide then if they wish to keep it or sell it and disperse the profits. Keep in mind that it’s important to update your will regularly to reflect any changes to your family’s situation and dynamics. For example, if you’ve named a son-in-law or daughter-in-law or step children in your will, but they are no longer in your family’s life, you’ll need to update your will to reflect those changes or your cottage ownership may end up in the wrong hands or tied up in the courts long after you pass away.
The best advice regarding cottage succession planning is to seek sound, legal advice. Once you’re armed with the right information, you can weigh the pros and cons of each option available to you and find the one that works best. It’s a very complicated, legal decision, and also sensitive and emotional, which is why you need to thoroughly understand the personal and financial implications. Connect with our legal team At Ares Law. We specialize in wills and estate planning, and we’ll leave no stone unturned when it comes to your will and succession plan. Call us today at our Parry Sound office, (705) 746-6444. We look forward to working with you!
