26 Jul 2016
Planning for the Family Getaway
Now that we are nearing the middle of summer – many of you will be thinking of days at the beach, on the water and being away from the hustle and bustle of everyday life. Long evenings and summer barbeques define our summer memories and a family vacation home or cabin is the setting for many of these special times. Many families have forged tremendous memories and bonds with time away at a vacation home.
For those of us lucky enough to have a vacation property owned in the US, a retreat in the Gulf Islands, or a cabin in the Cariboo many of these places have a special role in our families. Preserving these family assets and along with it all the memories associated with it needs to be planned for. Too many times we see these special places being turned into family nightmares either because they need to be sold quickly to settle Estate liabilities or because they’ve become a family battleground.
So what’s the big deal? Well as the saying goes, you can’t escape taxes. Most of you will be aware that your principal residence can appreciate in value and be sold without incurring income taxes. However, given the real estate price appreciation in Vancouver and the Fraser Valley, this exemption is needed for the family home. Vacation homes or cabins are, as a result, left subject to taxation when the owners pass away or when these properties are passed onto the next generation. And like anything else in life, a little prudent planning can make the difference between ensuring that these special places can pass to the next generation successfully as opposed to being sold off in order to solve a tax bill.
So what can you do about it? Have a plan. There are issues that need to be planned for:
Family Dynamics – Do all your family members want to be co-owners of the property? Do they all live in proximity to the property? Do they have the financial ability to pay their fair share of the annual costs and upkeep? In many instances it won’t make sense to leave it to everyone. Depending on family dynamics, putting family members and spouses in co-ownership will end up with too many “cooks in the kitchen”. Often this just leads to disagreements and family disputes – not exactly the legacy that one was hoping to leave. Careful thought as to family dynamics will often drive your decision making process.
Taxes – As one of the largest costs in your life, prudent planning for eventual tax bills is paramount to successfully transferring assets within your family. Typically the appreciated value of vacation properties will be subject to capital gains taxes which currently are approximately 23% of the total appreciation. As an example - if your property has increased in value by $500,000 it will be subject to approximately $115,000 of income taxes when you pass away. First off, knowing is half the battle, understand what the tax liability is and come up with a plan to get it paid when you pass away or pass the asset on. Whether the plan is a mortgage, life insurance proceeds, some cash savings or investments – there should be a plan in place to deal with the taxes if this property is important to keep in the family.
Probate fees – These fees are less drastic than income taxes, but still may also apply to the family cabin if it passes through your Estate. In BC the probate fee is 1.4% on the total value of the Estate. This will be a part of the decision making process.
The Whole Picture – Some of the decisions you need to make will need to be made in conjunction with your overall Estate plan. Your vacation property will just be one piece of the puzzle. Making the pieces fit together in a fair way might take a little bit of creativity and will definitely take some knowledge about what happens with your assets when they are passed onto the next generation. It should all fit together to make sure that it doesn’t become a source of unnecessary dispute.
We Are Here To Help
Manning Elliott is here to help if you have any questions about preparing a plan that can help your family navigate these issues. We have the experience to help you create a plan that addresses these issues and gets formally implemented as part of your Will or larger estate plan.
For more information, please contact us directly.
The above content is believed to be accurate as of the date of posting. Tax laws are complex and are subject to frequent changes. Professional advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.