By Fraser Willson
Special to the Financial Independence Hub
As the days of summer dwindle to a precious few, the last few weekends at the family seem especially poignant now. And while those thoughts may warm you up a bit, you don’t want to be left out in the cold if you’re not aware of the financial implications when you sell the family retreat or if you transfer ownership to your children this year.
Unlike with your home, transferring ownership of the family cottage to anyone other than your spouse may trigger a taxable capital gain on the appreciation in value during your ownership. You may want to consider leaving the property to your spouse. Doing this helps defer the tax bill until the property is sold or passed on to future generations.
In addition, there are a number of strategies that you can undertake to help reduce and potentially avoid the capital gains tax, including:
Selling and taking back a mortgage
If you decide to sell the cottage to your children, consider taking back a mortgage by offering your children a mortgage loan as payment for the purchase price. The capital gain can be spread over a period of up to five years. And you can forgive the mortgage in your will so your children will own the cottage without debt or paying taxes.
Transferring ownership while you’re alive
Transferring ownership of the cottage to a trust that designates your children as beneficiaries will trigger an immediate capital gain. But from that point on, your heirs are responsible for taxable gains. They won’t pay those taxes until they sell the property or transfer ownership.
Declaring the cottage as your principal residence
You can have only one principal residence for tax purposes. So if your cottage has gone up in value more than your home, consider designating the cottage as your principal residence, which isn’t subject to capital gains tax.
Buying life insurance
Family members can use the tax-free proceeds from a life insurance policy to help pay capital gains taxes on your cottage when you leave it as part of your estate.
If you plan to sell or transfer ownership of your family cottage this year, make sure your finances align with your goals. Doing so can help ensure you stay on track to reach them.