Whether you already own a vacation home - or you're just thinking about it - there are some key issues and planning ideas you need to consider.
Before committing a large amount of money to purchasing a second property, consider renting in a few desirable areas for a period of time to test the location and neighbourhood. Once you are comfortable with the location and have selected an appropriate property to purchase or build on, the next major decision is how the property should be financed.
If you require a mortgage, the mortgage interest will not be deductible if the property is used strictly for personal purposes. In order to make the loan interest deductible, consider the following two-step strategy:
1. Use existing cash or investable assets to purchase the property
2. Take out a line of credit to purchase income-producing investments
In this case, since the loan was used directly to purchase income-producing investments and not the personal property, the interest on the loan is potentially deductible.
Succession planning
In straightforward situations, a person often acquires ownership in a vacation property either solely or jointly with their spouse for control and simplicity reasons. As people get older and no longer actively use the vacation home, people 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 succession planning strategies to consider related to a family vacation home:
If 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 through 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, you will defer future capital gains tax 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.
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 your options include granting one or more children the option to purchase the property, allowing a child to take the property as part of their share in the estate or creating a testamentary trust to hold the vacation home under the terms of your Will. If the vacation home is transferred to a testamentary spousal trust the capital gains taxes can be payable upon the death of the last spouse.
Life 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. 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.
If more than one child will own the property, they can enter into a co-ownership agreement to determine when and how they can use it, as well as how expenses will be paid.
This article is supplied by Colin MacAskill, a vice-president and an investment advisor with RBC Dominion Securities Inc. Member CIPF. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article. Insurance products are offered through RBC DS Financial Services Inc., a subsidiary of RBC Dominion Securities Inc. When providing life insurance products, Investment Advisors are acting as Insurance Representatives of RBC DS Financial Services Inc. Colin can be reached on his direct line at 604-257-7455.
