Banner Ad

Home / News / The Big Picture Video / About Us / Advertise / Contact Us

The Family Vacation Property

By: Prashant Patel
September 2007

Whether you already own a family vacation property – or you are just thinking about it – there are many tax-related issues to consider. The following are some strategies to help you reduce the taxes associated with owning vacation property – and passing it on to family members.

SUCCESSION PLANNING

In straightforward situations, a person often acquires ownership of a vacation property either solely or jointly with their spouse for the control and simplicity. As people get older and no longer actively use the vacation home, they sometimes decide to transfer the property to their children. However, if the transfer of the property is not structured correctly, disharmony amongst family members can occur.

Here are some successful planning strategies to consider related to a family vacation home:

Family VacationIf your children will inherit the property and you expect it to significantly appreciate in value, consider gifting the property to the children today, either directly or to an inter vivos family trust if you wish to maintain control. Although this results in a disposition at market value triggering accrued capital gains to you today, the future capital gains tax is deferred and probate taxes are avoided. If the property is sold to the children, your capital gain can be spread over five years in some cases.

For additional tax deferral, you may want to consider the potential advantages and disadvantages of transferring the property to a Canadian corporation or to a non-profit corporation.

If the property value is high and you are over age 65, consider the cost/benefit of rolling it into an alter-ego or joint partner trust today in order to avoid probate taxes related to the property at death (particularly in provinces with high probate taxes).

You may leave the vacation home to one or more family members under the terms of your will. Some of the options include granting one or more children the option to purchase the property, allowing a child to take the property as part of his or her share in the estate, or creating a trust to hold the vacation home under the terms of your will. In this case, the capital gains taxes can be payable upon death of the last spouse.

Family VacationLife insurance can be used to pay any capital gains taxes triggered by the disposition of the property when your estate is settled. It also creates a pool of funds to pay children who are not interested in inheriting the property (alternatively, children who are interested in the property can take out a mortgage to buy out siblings who are not interested). In addition, life insurance can be used to provide the children with the money necessary to pay for the maintenance and expenses related to the property. Since your children will benefit from this insurance coverage, consider asking them to pay the premiums.

If more than one child will own the property, they can enter a co-ownership agreement to determine when and how they can use it, as well as how expenses will be paid.

Regardless of the succession planning strategy chosen, you can minimize capital gains tax on the disposition or deemed disposition of your vacation home, either during your lifetime or at death by:

  • Ensuring that any vacation home renovation costs are tracked as these costs add to the cost of the property for tax purposes and will reduce any future capital gain.
  • Using your principal residence exemption to reduce or eliminate the capital gains tax on the property. However, only one principal residence can be designated per family unit for years after 1981. So if the principal residence exemption is used for the vacation property to minimize the capital gains tax, then it cannot also be used to reduce tax on the disposition of the city home related to years after 1981.

U.S. REAL ESTATE

The U.S. government has an estate tax on the fair market value of property located in the U.S., even if it is owned by a nonresident. U.S. estate taxes range from 18 to 45 per cent of the fair market value of the U.S. assets. However, there are generous U.S. tax exemptions that are available to minimize or potentially eliminate the U.S. estate tax.

If your U.S. assets (typically U.S. real estate and U.S. stocks) are US$60,000 or less on death, then there would be no U.S. estate tax payable regardless of the value of your worldwide assets. If your worldwide estate is US$2 million or less upon death, then there would be no U.S. estate tax payable regardless of the value of your U.S. assets. If your worldwide estate is greater than US$2 million upon death, then there could be U.S. estate tax on the value of your U.S. assets.

There are legitimate strategies to reduce or eliminate U.S. estate tax, including taking out a ‘non-recourse’ mortgage against your U.S. real estate. This special type of mortgage reduces the value of the U.S. real estate subject to U.S. estate tax dollar for dollar.

Prashant Patel is vice-president, wealth management services, at RBC Dominion Securities.

* Reprinted with permission from RBC Dominion Securities Wealth Management Review, July 2007.

Sponsored Content header

banner sample

Private Wealth

 

Home / News / The Big Picture Video / About Us / Advertise / Privacy / Contact Us
©2014 Private Wealth Canada. All rights reserved.
Banner Ad