WHAT'S YOUR FAMILY'S WAY?
You're planning the big cottage transfer, but can you do it and avoid the dreaded capital gains tax and other pitfalls? The answer isn't black and white, although it may hinge on which generation has more discretionary income. Below, our guide to 11 of the most common scenarios for cottage succession, plus a few tips on how to make the process as cheap and cheerful as possible.
1) Give the cottage to your kids
Make sense when you've got your ducks in a row for retirement, and you don't need the additional income from selling the family summer home.
The drawback: All of the capital gains tax must be paid by the sellers over the next five years, assessed at the cottage's full market value.
Before you sign: You can specify that you want to maintain a "life interest" giving you access to the cottage even though your kids own it. (Hint: You can do this if you sell to your kids too.)
2) Sell the cottage to your kids
Makes sense when that B.A. miraculously pays off in a secure, well-paid job, or your kids are otherwise rolling in dough.
The Drawback: Be warned: Your cottage will be assessed at full market value, even if you sell it to your kids for a bargain. What's more, when they eventually sell it to their children, the capital gain will be assessed from that lower sale price.
Before you sign Remember that you can spread the capital gains tax over five years to take the sting out of the sale.
3) Establish joint tenancy
with rights of survivorship, where each parent and child becomes an equal co-owner of the cottage
Makes sense when everyone wants to keep the cottage in the family, but the parents can't afford to gift the cottage, and the kids can't afford to buy it in its entirety.
The Drawback: Capital gains won't go away: The owners still must decide whether the transfer of the cottage is a gift or a sale. What's more, a joint tenant can force the cottage to be sold if he or she wants out and the remaining tenants can't affordto buy it. And remember: Now you've got roommates. And they're your parents.
Before you sign: Keep in mind that it's a game oflast man standing. Once a tenant dies, his or her ownership is distributed equally among the remaining tenants, and the last to die owns the cottage outright.
4) Become tenants in common
where parents transfer over a percentage of ownership to their kids.
Makes sense when you and your family want or need to divvy up your cottage ownership in unequal percentages.
The Drawback: Unequal percentages can create complications when making decisions, especially if it comes time to sell outside the family. Again, the owners still must decide whether the transfer of the cottage is a gift or a sale. And don't forget: You've got roomates. And they're your children.
Before you sign: Each tenant decides who will inherit his or her portion of the cottage, so in-laws (and othrs) could wind up owners.
Part two of this Blog to follow....