The cottage real estate market is heating up along with the weather and brokers may be getting more inquiries from clients about purchasing these recreational properties. But are they prepared to answer all the questions?
Christine Van Cauwenberghe, the assistant vice-president of tax and estate planning at Investors Group, told MortgageBrokerNews.ca's sister publication, CREW, that vacation properties have quite a few unique expenses of which potential owners might not be aware – the most glaring of which are the tax considerations.
“The main thing with a cottage is that people have to understand that when you are passing on a cottage to someone else – to family, say – there is a potential capital gain,” Van Cauwenberghe said.
Van Cauwenberghe explained that when you dispose of assets – via inheritance, for example – it may trigger a capital gain that will equal the fair market value of the property less the cost base of the property, which can include capital improvements.
“So if you’ve invested money into the property it will affect capital gains,” she said. “If the property has gone up in value, 50 per cent of that is taxable, except when you transfer assets to a spouse, or if you use a principle residence exemption.”
Many people use the principle residence exemption for their urban home, and are not aware that the same exemption cannot be extended to their vacation property. Van Cauwenberghe says property owners need to account for that possible gain if they plan on passing the property on to family.