Vacation home purchase strategies
- Use existing cash or sell investable assets to purchase the property (note: disposing of investible assets may trigger capital gains or losses).
- Take out a line of credit to purchase income-producing investments. In this case, since the loan is used directly to purchase income-producing investments and not the personal property, the interest on the loan is potentially deductible.
If you would like to know how the purchase of a vacation home can impact other financial goals such as your retirement goals, speak to us about incorporating this purchase into your financial plan.
- If your children will inherit the property and you expect it to significantly appreciate, consider gifting the property to your children today directly or through an intervivos family trust if you wish to maintain control. Although this results in a disposition at market value, triggering accrued capital gains that are taxed to you today, the future capital gain tax is deferred and probate taxes are avoided. If the property is sold to the children, the capital gain can be spread over five years in some cases.
- Speak to your tax advisor about the tax advantages and disadvantages of transferring the property to either a Canadian corporation or to a nonprofit corporation.
Life insurance can be used to pay any capital gains taxes triggered by the disposition of property when your estate is settled.
- 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 trust to hold the vacation home under the terms of your Will.
- Life insurance can be used to pay any capital gains taxes triggered by the disposition of 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 into 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, two strategies to minimize capital gains tax on the disposition or deemed disposition of your vacation home, either during your lifetime or at death, are:
- To ensure that any vacation home renovation costs are tracked as these costs may add to the cost of the property for tax purposes and will reduce any future capital gain; an
- To use 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.
Speak to us if you require more information on vacation home planning.
U.S. real estate planning
- Purchasing U.S. real estate (and other assets such as U.S. stocks) through a Canadian corporation, trust or partnership. There are pros and cons to all three of these structures, but in particular you should be cautious about purchasing U.S. real estate through a Canadian corporation.
- Having a “non-recourse” mortgage against your U.S. real estate. This special type of mortgage reduces the value of U.S. real estate subject to U.S. estate tax dollar for dollar.
The U.S. has an estate tax on the fair market value of property located in the U.S., even if it is owned by a non-resident.