Vacations at the family cottage is a cherished tradition, and so it would make sense that you would want to pass it on for generations to come. However, passing a vacation property on to your children can have tax consequences for you & your heirs which could make the inheriting the family cottage a burden, not a gift. Read on to learn some tax strategies for passing on your vacation property.
Sell Now or Inherit Later?
It’s a persistent rumour that selling your cottage to your children instead of waiting for them to inherit it can mitigate their tax burden. Or, perhaps that selling an even a 50% stake in the property to your children can lessen the tax burden when it comes time to inherit the rest.
This isn’t necessarily true. Whether you sell your cottage to your children now or they inherit it later, they will still incur the same tax burden, the only difference is the timing. The taxes are based on the deemed capital gain – calculated by subtracting the original sale price from the current Fair Market Value plus any renovations made to the property. Whether you sell now or inherit later, paying taxes on transferring ownership family cottage will be inevitable.
Cover Your Bases
So, is there any way to mitigate the tax burden?
- Life Insurance: It may make sense to some to purchase life insurance to cover the taxes, however there are several downsides. It may be difficult to guess what the taxes will be early enough to buy a sufficient policy, or waiting until later in life when you have a better idea may risk your ability to purchase the policy to begin with. Finally, the cost of the premiums for the insurance policy may outweigh the benefits and could have been more productive invested elsewhere.
- Gift or Sale: It’s possible to gift or sell the property to your heirs at a more opportune time, before it has increased in value significantly can reduce the tax burden on your children. However, should the property increase in value after the sale, the tax burden will be passed on the the next generation.