Emotion versus money: Passing on the cottage

A family vacation home is more than an asset. It’s years of shared memories. That’s why passing it on to your children can be both emotionally and financially taxing.

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Memories of summers on the dock may make it hard to talk about the future.

A heart-to-heart family chat is a good place to start. Do your kids live close enough to regularly visit the cottage or are they only there once or twice a year? Are siblings ready to share both the enjoyment and work of looking after the property?

Start that conversation now, in order to understand what your family really wants and avoid possible disagreements down the road.

Keeping a cottage in the family requires tax planning.

The biggest hurdle is capital gains tax, which is the difference between the fair market value of the cottage today, and what you paid for it plus any major improvements like a dock or boathouse.

One strategy to avoid capital gains on the sale may be to designate it as your principal residence. However, this option can become complicated if you have owned more than one property for your personal use during the time you’ve been living at the cottage. Your IG Consultant can engage the tax experts you need to calculate the right way to go based on your financial situation.

What if you leave the cottage to the kids in your Will?

Upon the death of the last spouse, the property will be assessed as if it was sold at fair market value. That means not only the cottage, but the tax bill, will pass to your estate. Without proper planning, your family may have to sell the cottage itself in order to cover taxes.

One solution is to purchase life insurance and let the death benefit pay the taxes on the cottage. Your children may even be willing to pay the premiums if it means the difference between keeping the cottage and selling out of financial necessity.

What about transferring ownership to your children during your lifetime?

You can sell or even gift the property to your heirs, but it will still be taxed as if it was sold at fair market value. Again, careful tax planning is critical.  In addition, you will lose control over the asset, so this course of action is generally not recommended unless you are completely certain you will no longer need the cottage for your own use.

Talk to your family and your IG Consultant about ways your family getaway can continue to be a place for building happy memories for generations to come.

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