Reducing Tax Liability on Transfer of the Family Cottage
With the long weekend nearly upon us, what better time to discuss the family cottage?
If you transfer your cottage to your children while you are living, you will be deemed to have disposed of it at its fair market value and be liable for the resulting capital gains tax which, depending on how long you have owned the cottage and how much it has appreciated, might be astronomical.
One way of reducing tax liability is to take advantage of the principle residence exemption. In doing so, the size of the capital gain will be calculated using a formula involving the number of years you have owned the cottage and the number of years it has been designated as the principal residence.
Keep in mind, however, that after 1982, spouses could no longer designate different properties as their principal residences and, as a result, consideration should be given to the increase of value in your city residence – if the capital gain on it is greater than on your cottage, designating your cottage as your principal residence may end up increasing, not decreasing your tax liability.
Another option, of course, is to simply allow your children to inherit the property after both you and your spouse have died. At that time, there will hopefully be sufficient assets in the estate to pay the capital gains taxes which arise.
In any event, if you have a cottage which has increased substantially in value, it might be worth your while to discuss ways to reduce tax liability with an expert in estate planning.
Have a great long weekend!