It’s been a long hard winter, but right on queue, summer is all but upon us. Our thoughts are turning to sun filled vacations and cottage life. Canadians love the cottage lifestyle and many owners who purchased years ago for a minimal investment are today sitting on a significant family asset.

Many view the vacation property as a sentimental asset. It is a venue commonly used for holidays and family gatherings. In many cases it is a place that represents good memories and happy thoughts. Therefore, many families are set on preserving the vacation property at any cost. Whether you are considering investing in a vacation property, or assuming the ownership responsibility as an inheritance, there are a few points to consider about owning a vacation property.

The cost of maintaining a second property can be significant. Not only is there a cost of maintenance, utilities and upkeep but you must also account for the annual property tax bill. As the cost of gasoline continues to rise, so does the cost to commute to the cottage. These costs can weigh heavy on a family with a limited budget.

There is also an income tax cost that should be considered. Families are eligible to designate one property at a time as their tax-free principle residence. Typically the vacation property is an ownership of a second piece of real estate. That deems it an investment and subject to capital gains tax. Whether the property is sold or inherited by a non-spouse, at some point capital gains tax must be paid. Currently 50% of the gain is taxable at your marginal tax rate. Although numerous planning ideas have been invented to reduce or defer tax liability on the cottage transfer, the most common are the use of life insurance and a trust. Due to the complexity these solutions should be discussed separately with your financial planner.

It is important to realize that the family vacation property is not easily divisible. Many properties are purchased with the intention of passing it down the family line for generations to enjoy. Parents often assume that the children will naturally want to share the ownership of the cottage. This is not always the case. Siblings move away from each other and will often live a great distance from the cottage. There may come a time to decide who will ultimately become responsible for the legal ownership and upkeep of the property. This situation may lead to financial burden and family conflict rather than a joyful gift.

Well enough said on the negative side of cottage ownership. Warm weather is upon us and as long as you do your homework, are comfortable with the annual costs and have planned for the ultimate capital gains tax, then cottage ownership may be the perfect investment for you. Cottage ownership can truly be a wonderful and satisfying investment. Enjoy it while you can 'cause you can’t take it with you.

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.