Summer haven is not a tax haven


Your cot­tage, or any other va­ca­tion prop­erty for that mat­ter, can be an im­por­tant part of your fam­ily life — and you might want to leave it to your fam­ily.

But 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 cot­tage has ap­pre­ci­ated in value, there could be a sig­nif­i­cant cap­i­tal gains li­a­bil­ity that could force your heirs to sell the cot­tage.

These are some of the op­tions you should con­sider to re­duce the tax bite to your es­tate and your heirs:

• Prin­ci­pal res­i­dence ex­emp­tion (PRE). You are able to make a prin­ci­pal res­i­dence ex­emp­tion claim on ei­ther your city home or your va­ca­tion prop­erty as long as you meet the re­quire­ments.

If your va­ca­tion home in­creases in value more than your city home on a per year ba­sis, the ex­emp­tion might be bet­ter ap­plied to that prop­erty.

How­ever, if you have bought and sold sev­eral city homes over the same num­ber of years that you have owned your va­ca­tion prop­erty and ap­plied the PRE on those city homes, you will not be able to shel­ter the en­tire gain on your cot­tage.

• Pre­serv­ing the ad­justed cost base. Another op­tion for min­i­miz­ing the tax­able cap­i­tal gains is to en­sure that all ad­di­tions to the ad­justed cost base (ACB) of the prop­erty are fully ac­counted for. The ACB is not in­creased by sweat eq­uity, only out- of- pocket ex­pen­di­tures — so keep your re­ceipts.

• Gift­ing dur­ing your life­time. In­stead of leav­ing prop­erty to your chil­dren through your will, you can choose to trans­fer some or all of it to them dur­ing your life­time — through the out­right gift of the prop­erty or by mak­ing one or more of your chil­dren joint own­ers (with or with­out you as a joint owner).

This op­tion does have a down­side be­cause it may trig­ger an im­me­di­ate cap­i­tal gain and life in­sur­ance is not an op­tion for pay­ing this tax.

• Equal­ize your es­tate with in­sur­ance. One good way to cover cap­i­tal gains and other es­tate debts — or to pro­vide an eq­ui­table amount of money to your other chil­dren should you de­cide to leave your va­ca­tion home to just one child — is with per­ma­nent life in­sur­ance.

The death ben­e­fit is usu­ally tax- free and can pro­vide a ready source of cash that could pre­vent the forced sale of as­sets — in­clud­ing your cot­tage — to pay taxes.

It’s a good idea to dis­cuss your cot­tage tax is­sues with your le­gal and fi­nan­cial pro­fes­sional ad­vi­sors to en­sure they co­or­di­nate with all the other as­pects of your fi­nan­cial and es­tate plan.

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