ReportWire

Tag: cottage ownership

  • Yes, a cottage is an investment property—here’s how to minimize capital gains tax – MoneySense

    Yes, a cottage is an investment property—here’s how to minimize capital gains tax – MoneySense

    [ad_1]

    Should you keep renting a cottage or buy one?

    You don’t need me to explain the personal perks of having a vacation home or a cottage. But to many people, a cottage is also an investment. There are costs and hopefully returns, especially if you decide to rent it out. If you hope to buy, find out what you need to pay beyond the listing price and how you might finance the purchase.

    Read: Is a vacation home a good investment?

    Is there a capital gains tax exemption for a cottage?

    Sorry to be the bearer of bad news, but there isn’t. There was once a lifetime capital gains exemption of $100,000, but that no longer exists. It only applied in Canada from 1984 to 1994. There are other ways to minimize taxes on the sale of a cottage, though. What about selling to a family member: Can you avoid taxes that way? It depends on a few factors, such as the relationship, if the second property can be claimed as a principal residence, and more.

    Read: Can I sell my cottage tax-free?

    Read: Selling a cottage to a family member: What that means for capital gains

    Do you pay tax when inheriting a cottage?

    The short answer: It depends on your relationship to the person who owns it. Are you an extended family member? Their adult child? Or are you their spouse? Find out how inheriting a cottage can affect taxes for a spouse with children and the steps to take to minimize what’s owed. 

    Read: Inheriting cottage and the capital gains implications

    How to reduce taxes on the sale of a cottage

    This next article goes through the multiple factors that can influence how you plan for capital gains on family-owned cottages, including: 

    [ad_2]

    Lisa Hannam

    Source link

  • Adding names to a cottage deed could result in big tax bills

    Adding names to a cottage deed could result in big tax bills

    [ad_1]

    You mention that the cottage deed is in your name only right now. That suggests that it was either in your name all along or that the cottage was owned jointly with your husband with right of survivorship. I suspect it was held jointly with right of survivorship, meaning that it was transferred directly to you on your husband’s death. That means that it passed outside of his will regardless of his wishes contained therein.

    Ask a Planner: Leave your question for Jason Heath »

    Are there capital gains on inheriting a cottage?

    Sometimes the ownership structure of an asset trumps a will, and this may be a case of that, Jill. When an asset passes to a surviving spouse on death, by default, it is transferred at its adjusted cost base for tax purposes, meaning no capital gains tax is payable at that time. The executor can elect to have some or all of the capital gain taxed on the final tax return of the deceased, if it’s advantageous to do so, but let’s assume this didn’t happen. This means that all the accumulated capital gains have been passed along to you and this is important as it relates to the next steps you take with the cottage.

    Do you have to share an inherited cottage?

    You may not have a legal obligation to include your three stepchildren in the ownership of the cottage, Jill, since the cottage passed outside the will due to joint ownership. If you are in doubt, you should seek legal advice. It sounds like there is at the very least a moral obligation to include your stepchildren in the ownership, but it will result in a gift to your husband’s children—and therefore has tax implications.

    Beneficiary of taxes

    Because the accumulated capital gains have all been passed along to you, if you gift three-quarters of the cottage to them, you will personally have a capital gains tax liability in the year of transfer. Some people think they can skirt the capital gains tax by making the gift for $1 or for a value equal to the cost, but that’s not the case in Canada. The transfer in ownership needs to happen at the fair market value, meaning the appraisal you suggested may be relevant, Jill. An appraisal is not mandatory when determining the fair market value for a transfer but may be advisable.

    Assuming you have sufficient resources to pay the capital gains tax, you may not be worried. But the capital gains tax bill could be a big one if you’ve owned the cottage for a long time.

    Keep in mind there are options. You could treat the cottage as your principal residence, with the transfer to your stepchildren, therefore being tax-free. But this would expose your house in the city to capital gains tax on the sale of it or upon your own death.

    You need to weigh the pros and cons of paying tax today versus deferring it to determine, if this is advantageous to use the principal residence exemption for the cottage. You may also be limited in doing so if you had a previous principal residence that you sold during the time you have owned the cottage and you treated it as your principal residence, with no capital gains tax payable. This would negate the years you owned the cottage and claimed another principal residence exemption.

    [ad_2]

    Jason Heath, CFP

    Source link

  • Tax deductible expenses when selling a cottage

    Tax deductible expenses when selling a cottage

    [ad_1]

    There are a number of expenses that can be claimed to reduce the capital gain on your cottage, Louise. Capital expenses are an example. The Canada Revenue Agency (CRA) defines a capital expense as an expense that:

    • Gives a lasting benefit or advantage;
    • improves the existing property;
    • is a separate asset; or
    • is considerable in relation to the value of the property.

    Capital gain vs capital expense for the costs of owning and selling a cottage

    There’s a distinction between a capital expense—which increases your cost base and reduces your capital gains tax on a property—and a current expense, which is a repair. Repairs are only tax deductible when a property is used for rental or business purposes against the income earned but have no impact on capital gains.

    In your case, Louise, a good example of a capital expense would be your expense to change a shingle roof to a metal one. In particular, it provides a lasting benefit, is an improvement to the existing roof, and is considerable in value.

    The windows and flooring also provide a lasting benefit. The stove is a separate asset, in its own right. So, these three expenses would also generally be capital expenses that would be added to the cost of the property for capital gains tax purposes.

    What is a capital gain?

    A capital gain is the increase in value on any asset or security since the time it was purchased, and it is “realized” when the asset or security is sold. (Similarly, a capital loss is realized when you sell an asset that has decreased in value since the time of purchase.) Capital gains (or losses) can happen on stocks, mutual funds and real estate. 

    Read more about capital gains in the MoneySense Glossary: “What are capital gains?”

    Is replacing a cottage deck a capital expense?

    The replacement of the old deck and stairs may not be a capital expense, Louise. In fact, the CRA gives a specific example on their website of an expense for wooden steps being a current expense. If you were to replace wooden steps with concrete steps, that would be a capital expense. If you were to repair wooden steps, it would not be a capital expense. It would be a current expense or repair as opposed to a renovation or improvement. So, whether the deck and stair expenses are capital or current would be a matter of fact depending on the exact nature of the work.

    Note that the CRA does not give a specific list of capital expenses, but rather, guidelines for determining the nature of the expense.

    Cottages for sale: What happens if you have a capital gain?

    The calculation of your cost base for tax purposes will then be equal to your original purchase price, closing costs on acquisition, and capital expenses over the years. The proceeds, less the selling costs, less your cost base gives you your capital gain. Half of your capital gain is taxable on your tax return in the year of sale, or two thirds if the capital gain in excess of $250,000 in a given year for a taxpayer. A large capital gain in a high income year could give rise to 25% tax or more depending on your province of residence, income sources, and the magnitude of your capital gains for the year.

    Read more about owning a cottage:




    About Jason Heath, CFP

    Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

    [ad_2]

    Jason Heath, CFP

    Source link

  • Is a vacation home a good investment? – MoneySense

    Is a vacation home a good investment? – MoneySense

    [ad_1]

    Sometimes, emotions are the motivation for buying a vacation property. I like to evaluate a property purchase from a financial point of view as well—and here’s how. 

    The costs of buying a vacation property

    Say, a property’s purchase price is $500,000. Whether you use cash, a mortgage/home equity line of credit, or a combination of the two, there are other costs to consider.

    If you purchase with cash that you could otherwise invest for a 4.5% return (to use a conservative assumption), there is an opportunity cost of not investing that money or leaving it invested. If you borrow money, there may be an interest cost of 4.5%. So, to keep it simple, we will assume an opportunity cost or financing cost of 4.5%. 

    Property taxes, utilities, insurance, condo fees, and maintenance could easily add another 2% to 4% per year in costs. Those costs could be even higher for an older cottage or for a property with amenities and high fees, but we will assume 3% per year for discussion purposes.

    So far, our costs are up to 7.5% per year on a $500,000 property, which works out to $37,500 per year for our notional vacation property. 

    You’re 2 minutes away from getting the best mortgage rates in CanadaAnswer a few quick questions to get a personalized rate quote*You will be leaving MoneySense. Just close the tab to return.

    Expected returns on vacation properties

    What about the financial return from owning the property? Canadian real estate prices have risen by about 6.3% per year for the 10 years, ending Dec. 31, 2023. Over the past 30 years, the increase is about 5.1%. Some cities have seen much higher growth rates, and others much lower. Prices have also cooled off significantly in the past couple of years. (Check out MoneySense’s guide on where to buy real estate in Canada.)

    Over the long run, in the U.S., real estate prices have risen just slightly more than inflation. In fact, since 1890, U.S. real estate has increased by less than 0.6% per year above the rate of inflation. Given the Bank of Canada’s 2% inflation target, despite a recent spike in the cost of living, I would argue a more reasonable long-term growth rate for real estate is 2% to 3%.

    So, we will assume the value of our notional $500,000 property grows at 3% per year; in the first year, that would be $15,000. That means the net cost in year one of owning the property is 7.5% (or $37,500) minus 3% (or $15,000), totalling 4.5% (or $22,500).

    Buying versus renting a vacation home 

    If you are contemplating a $500,000 vacation property purchase, and you think my assumptions are reasonable, you need to ask yourself: Are you going to get $22,500 worth of use out of the property? Could you rent a comparable property for less than $22,500 per year, for the time you plan to use it? If you could, a vacation property purchase may not be the best financial choice.

    [ad_2]

    Jason Heath, CFP

    Source link

  • How real estate is taxed during a separation or divorce – MoneySense

    How real estate is taxed during a separation or divorce – MoneySense

    [ad_1]

    How an asset transfer between spouses is taxed

    First off, a transfer of assets between spouses is by default done on a tax-deferred basis at the original purchase price. So, whether the properties are held individually or jointly, either person can transfer their share of the ownership of a house and/or cottage to the other spouse without triggering an immediate tax implication.

    They can elect for the transfer to occur at any value between the adjusted cost base and the fair market value. We will come back to this point.

    Watch for spousal attribution

    When married or common-law couples transfer assets between each other, there’s always the risk of spousal attribution. This may apply if one spouse owns an asset or contributes primarily or exclusively to its purchase and transfers the asset to the other spouse. If the receiving spouse then earns income from it or sells it for a profit, there may be attribution of the income back to the transferring spouse. The income, or capital gain, would be taxable to the transferor.

    Spousal attribution does not apply after separation or divorce. So, you can transfer assets and not have to worry about future income being allocated to you down the road. However, there could be lingering tax implications for one or both individuals.

    How the principal residence exemption applies in separation or divorce

    A couple can only have one principal residence in any given tax year. Your principal residence is not necessarily the place where you primarily live. You can claim your cottage, for example, as your principal residence.

    When a separation is amicable, the couple should determine together which property, when treated as the principal residence, would result in the least amount of tax. Specifically, they should consider the annual capital appreciation of each property, calculated as the total appreciation divided by the years of ownership.

    Let’s say ex-spouses named Jo and Chris owned a cottage for a short period of time, and it appreciated significantly. They might agree to treat the cottage as their principal residence for the years they owned it. Jo could transfer full ownership to Chris, and they could jointly elect to have the transfer take place at the fair market value. Jo could claim the principal residence exemption to avoid tax in the year of transfer. Chris may be able to claim the cottage as their principal residence for all years of ownership given it will be the only property they own after the separation, and it will qualify for the principal residence exemption in subsequent years as well.

    That means Jo will have to pay tax for some years of house ownership, because the cottage was claimed as the couple’s principal residence during the years it was owned. Jo may have some years of ownership before the cottage purchase, as well as more years after the separation, where the house can be their principal residence. But they will have to pay some capital gains tax eventually when they sell the house. It will be based on the total appreciation when they sell it, or die, and the pro-rated years where the couple claimed the cottage relative to the total years of ownership.

    [ad_2]

    Jason Heath, CFP

    Source link

  • Family legacy: How to pass along the family cottage—and 3 things to avoid – MoneySense

    Family legacy: How to pass along the family cottage—and 3 things to avoid – MoneySense

    [ad_1]

    There’s no one-size-fits-all solution. “Planning has a lot of moving pieces, and it’s very important to get it right, and it’s very easy to get wrong,” says Peter Lillico, partner at Lillico Bazuk Galloway Halka Law firm in Peterborough, Ont. He is also a speaker at the Cottage Life shows. “Every family is unique, every cottage is unique, and every cottage succession is unique.” Here, he breaks down the common misconceptions Canadians have about estate planning around the family cottage.

    You’re 2 minutes away from getting the best mortgage rates in CanadaAnswer a few quick questions to get a personalized rate quote*You will be leaving MoneySense. Just close the tab to return.

    Myths around cottage succession 

    Identifying any potential issues is the first step in navigating how to transition the family cottage effectively. Let’s look at some common misconceptions and the solutions that work.

    1. Assuming everybody will get along

    Many parents assume that their children and other family members will agree on how to use and maintain the cottage. This is a mistake because it overlooks the potential for conflicts and differing expectations.

    For example, take a family with two adult children, one living in Alberta and the other in Ontario. The one who lives close to the cottage in Ontario may use the property quite often. However, if the expenses are split 50/50 between both, this can lead to arguments. Lillico says: “There are cottage sharing agreements that can, and should, be worked out beforehand.” Parents (and/or their adult children, frankly) can create agreements that outline rules around care and expenses, and whether they should be shared equally or allocated in proportion to usage, or whatever the family wants. 

    A cottage sharing agreement is a binding document that passes the ownership and control from one generation to the next. It doesn’t just include estate planning details, but also future rules around the cottage. It contains structured instructions for financial responsibilities, sharing usage concerns, division of ongoing labour and maintenance, and even dispute resolution. Lillico explains a real estate lawyer can help with the cottage sharing agreement, as well as “a worksheet that helps [parents] to consider how well suited the kids are for cottage ownership.” 

    2. Underestimating capital gains tax

    Some Canadian cottage owners may believe that succession of the property will leave their children with a valuable asset, but many underestimate the costs of capital gains tax and unforeseen maintenance expenses.

    As real estate prices increased over the years, the family cottage may have risen in value significantly, especially if it was purchased decades ago. This leaves owners facing capital gains tax when they sell the property. Capital gains tax is levied on the profit of the cottage, which is considered a capital asset. 

    Capital gains and losses are calculated based on the difference between the selling price and the original purchase price, adjusted for certain eligible expenses like renovations and improvements. (So, keep those receipts to lower the gain!) 

    A loss can be used to reduce owed taxes on a personal income tax return. A gain, however, is taxed, but not all of it. The taxable portion of a gain is divided in half, and that amount is added to the individual’s overall income and taxed according to their income tax bracket.

    [ad_2]

    Debbie Stanley

    Source link