Vacation property: look beyond the dock
This summer, with the demand for vacation homes spiking due to COVID-19, you may have realized that the family cottage, cabin or chalet has become an even more valuable asset.1 The increased desire to own a private getaway is due in part to social distancing protocols and limited travel options. Also, more people recognize they can work remotely with a good internet connection.
As these properties account for a larger portion of family estates, it’s more important than ever to plan a smooth transition with your loved ones. “If you pass away without an estate plan that includes your family vacation property, its future could be at stake. This is where professional advice is important,” says Jamie Golombek, Managing Director, Tax and Estate Planning, CIBC Private Wealth Management.
Here are some considerations to help plan for the future of your vacation home.
Talk with your loved ones
The decision to keep a vacation property within the family or sell it to others can lead to an awkward family conversation. It’s important to recognize the powerful emotional connections associated with your family cottage. Memories of time spent together there can often make it challenging to separate logic from desire and determine the most sensible course of action. Family members may also have different expectations.
Take an open and honest approach to your unique situation and together ask yourselves these questions:
- Can you or your beneficiaries afford to keep the property?
- Do you need to rent it or sell it to help fund your expenses?
- If you want to sell the cottage to family members during your lifetime or upon your death, can they afford to buy it?
Having a genuine discussion and addressing potential issues upfront may allow you to create a clear plan of action that can help avoid future conflicts.
Consider capital gains
The sale of a vacation property can trigger income tax on capital gains, but there are several strategies that may reduce the amount of tax that will be paid. You may be able to designate your vacation home as your principal residence, which could shelter some or all of the capital gains from tax. Although you don’t have to live there full time to do this, if you own more than one property, you generally can only designate one as a principal residence. Choosing to designate your vacation property may make sense, depending on the appreciation of your vacation home versus your family home.
“Although numerous planning ideas are available to offset, reduce or defer the tax liability on the transfer of the vacation home, one of the most common is the use of life insurance,” says Golombek. “You may be able to purchase a life insurance policy to help offset the tax liability upon death.”
Plan for probate taxes/fees
In some provinces and territories, estate administration taxes (probate fees) on your estate assets, including real property that you own upon death, can be significant. “In fact, a vacation property could be subject to probate fees twice—once on the death of the original owner and, if left to a spouse or partner, again on the death of the survivor,” says Golombek. “But there are some planning techniques that may help reduce or eliminate the cost.”
You may want to consider transferring the vacation home into joint ownership or a family trust during your lifetime. When property is owned jointly with right of survivorship, it would generally pass to the surviving joint owner(s) without going through probate. In the case of a trust, the property generally would not form part of the estate of the original owner on their death. The trust can then be administered by a trustee and may provide more control over when (or if) the vacation property will be transferred to your intended beneficiaries.
It’s important to note that transferring property into joint ownership or a trust may trigger tax on capital gains and affects your control over the property. Remember to consult legal and tax advisors about the risks and benefits and to create a plan that sets out your intentions clearly to help fulfill your wishes.
Proactively discussing your plans for your family’s vacation property may help provide peace of mind to you and your family. Everyone’s situation is different. Contact us if you’d like additional information on transitioning your vacation home or help to identify questions to discuss with your tax and legal advisors.
Insurance services are available through CIBC Wood Gundy Financial Services Inc. In Quebec, insurance services are available through CIBC Wood Gundy Financial Services (Quebec) Inc.