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The Money Management
Newsletter: Taxes
and Estate Matters How to transfer your vacation property Tax-saving strategies to help keep the cottage in the family Your family cottage is a valuable asset. And not just in a financial sense: it brought you and your family years of enjoyment. Surely, keeping it in the family is an important goal. In normal circumstances, an appreciating asset is something to be happy about. But when it comes to the family cottage, things are rarely so simple. In fact, a substantial appreciation in the family cottage can create a “cottage crisis” within your family. Here’s why. A typical scenario David and Mary purchased a vacation property 25 years ago. Although their children are grown, the kids still frequent the cottage, now with their own children. Over the years, the cottage has appreciated dramatically—it’s now worth $300,000 more than its original purchase price. While capital gains taxes have declined in recent years, the tax bill on this family cottage is expected to be substantial. If nothing is done to rectify the situation, a full $150,000 would have to be included as taxable when the cottage passes to the children. At a tax rate of 41%, the total bill will be $61,500. If the children don’t have the resources to cover the tax, they may be forced to sell the property. It doesn’t have to be this way. Here are some simple suggestions that can help you avoid the same predicament David and Mary find themselves in. Gifting While gifting will not eliminate capital gains taxes, it can control them. By choosing to give the family cottage to your children before you pass away, the property is deemed to be disposed at market value, thereby triggering taxes. However, future capital gains will be the responsibility of the new owner. This can be an effective strategy if such a transfer is made early enough, and if family conflict is not an issue. Life insurance Universal life insurance (UL) can be an effective way to help heirs with a tax bill. UL insurance combines permanent life insurance and an investment account, allowing for a build-up in policy value. Funds from a UL policy are paid to beneficiaries tax-free, and are usually transferred to heirs more quickly than standard estate distributions. These funds can then be used to pay the capital gains tax on the family cottage with ease. Principal residence If you find that the capital gains owing on your cottage will be higher than capital gains on your home in the city, it might make sense to designate the vacation property as your principal residence. This way, any increases on the cottage will not be taxed, thanks to the principal residence exemption. Keep in mind, however, that taxes will then accrue on your home in the city. As you can see, there are many ways to save taxes and keep a vacation property in the family. A discussion with your Fiscal Agents investment or insurance advisor can help get you started.
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, Fiscal Agents Money Management Newsletter
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