A family cottage is meant to be a respite from the world, but when it comes to what to do when it’s time to pass that property along things get far less relaxing. Whether you’re talking about a simple camp in the woods, or a magnificent oceanside getaway, there’s a lot that goes into making these decisions, but I’ve got a few ideas to make things a little easier.
A family cottage might seem simple when it’s owned by a grandparent who maintains and cares for the property, but once it needs to be passed on to adult children, what once seemed simple can quickly become complicated and heated.
Does Your Family Want It?
It might seem obvious that if your family enjoys the property now they’ll want to continue to. It’s still important to ask what your family actually wants. What was a labour of love for you might feel like more of a burden for others. There’s a lot of work that goes into maintaining a separate property, is your family prepared to keep it up.
Maintenance is another concern, a property you don’t live in, needs to be cared for differently. Does your family have the skills to keep up with the ongoing maintenance? If they don’t have the skills, do they have the cash? These are all elements to include in your conversation with your family.
What About Taxes?
This is one of the bigger unconsidered concerns when it comes to a cottage. The capital gains tax on the property can be substantial, especially if you’ve owned it for a long time. This tax is triggered when the ownership is changed outside of a spousal relationship. There’s a principal residence exemption for capital gains tax, but by its very name, a second property isn’t really a principal residence. If you’ve owned your property for twenty or thirty years, or with how housing prices have changed in the last few years, even five years, then what you paid for it could be substantially different from what it’s worth.
For your specific situation it’s always best to chat with a tax professional, but to give some broad considerations, you can look at what you paid for the property and subtract it from what you think it would sell for today. That amount will be included at 50% on your tax return when you no longer owe it. So to give an example, a cottage you bought for $50,000 that is today worth $250,000 would have a capital gain of $200,000, which is included at $100,000 on your tax return, which is going to come with a substantial tax bill.
It’s always better to be prepared, and this brings us to another concern for making sure you can pass a cottage along.
Can Your Family Afford to Keep It?
As I talked about above, the taxes alone can make it difficult to hold on to a property, if there aren’t financial resources available elsewhere, your family might be forced to sell the property in order to pay the tax bill. Having a good idea about what that bill will look like can help you plan for how it’ll be paid, whether it’s with insurance, other savings you may have, or making sure your family can afford to pay the bill, it’s always better to know what to do beforehand.
A cottage can be a wonderful space that brings family and friends together. It’s a place for you to pour your time, effort, and love into so these discussions can feel difficult. It’s hard to feel like something that matters so much to you, might not hold the same place in your children, or grandchildren’s heart. It’s always best to talk things through, the last thing anyone wants is something so cherished to become a point of consternation and conflict.
Until next month, enjoy the sunshine!
Laura Whiteland is a CERTIFIED FINANCIAL PLANNER® and Chartered Investment Manager® Professional, she is the owner of Inclusive Financial Planning, a fee-only financial planner. Laura also hosts Stress Free Finance, a podcast dedicated to taking the stress out of personal finance.
This article is intended as general financial information and should not be construed as personalized financial advice.