Buying a recreational property?

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We are fortunate to live in the Okanagan. And it’s proving to be a very desirable location for real estate investment.

Recently, both residential and vacation properties have experienced large increases in value.

Do you already own a piece of vacation property?

Perhaps you are considering selling it or wanting to pass the property onto your children.

Are you perhaps a potential buyer and considering the purchase of a cabin or lot?

Whether you are selling or buying real estate, it is important to be aware of the tax consequences before making final decisions.

Many Canadians consider themselves familiar with the tax treatment of selling their principle residence home.

Contrary to popular belief, however, the criteria used to define one’s principle residence is not simple.

In order for a home to be designated as your principle residence and for the sale to be considered tax free, certain conditions have to be met.

Some considerations are being a Canadian resident, the ability to claim only one home, ordinarily inhabiting the residence and a limit on the size of property.

Many people mistakenly believe there is a specific amount of time they must own a home in order for it to be considered a principle residence.

If you sold your principle residence in 2016, you were required to report the transaction on your personal income tax return.

The sale of your principle residence has not become taxable, but details of the sale now need to be reported on your tax return in the year it is sold.

This is a new requirement for years 2016 going forward.

For all other property you own, capital gains apply upon the disposition or sale.

This includes recreational and vacation properties along with vacant land.

Capital gains may be triggered in situations, such as when the owner dies, the property is sold, or when it is gifted to a child or grandchild.

If recreational property is sold while the owner is alive, the selling price is normally equal to the fair market value at the time of the sale.

This value is used to establish the amount of capital gains resulting from the sale and income taxes payable.

If an owner wishes to pass or gift the vacation property to their children, the same principle applies.

Whether the transfer of ownership happens upon the death of a parent or while the parent is still alive, the transaction is deemed to occur at fair-market value on the date of transfer.

A capital gain is the difference between the cost of the property and the fair market value or proceeds on sale.

Currently, one half of this gain is included in your income for tax purposes.

For example, if a parent owns a cottage with a fair-market value of $500,000 and the original cost was $80,000, the capital gain is $420,000.

One half of this capital gain, or $210,000, is added to the taxable income of the parent in the year the cottage is sold, transferred or gifted.

You can see that as the value increases, so do the income tax implications.

In B.C., property and purchase costs may be subject to goods and services tax (GST), provincial sales tax (PST), or both taxes.

Real estate purchased in B.C. is also subject to property purchase tax.

If you are a non-resident, you may be subject to additional taxes.

What happens if the vacation property is owned by more than one person?

In this case, the tax consequences would be spread between the owners in proportion to their interest.

Joint ownership between spouses is a common way of owning recreational property.

Many people mistakenly think if they own an asset with another person they own that asset jointly.

Legally, this is not necessarily so.

The expression joint ownership applies to those situations where an asset is owned by more than one person with rights of survivorship.

This means upon the death of one of the owners, the title passes directly to the surviving owner(s).

As with many choices we make, income taxes are an important consideration when recreational property is owned, either individually or jointly.

Doing your homework beforehand helps make sure you have explored all the issues and know what is involved.

Disposition of property can range from a good tax decision to a very expensive lesson.

Marion Wahl is a Kelowna-based chartered professional accountant. She can be reached at info@wahlcga.com.