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The Okanagan makes an easy getaway to another world.
With its vineyards, orchards, and lakesideleisure, the Okanagan makes an easy getaway to another world. It’s no wonder somany people decide to move beyond the realm of Airbnb for a place of their own.
While owning a vacation property in B.C.’swine country may be a dream come true, making such a purchase calls for soundfinancial planning.
We asked Nicole Ewing, Vice President,Tax, Estate, and Business Succession at TD Wealth, to share herinsights on what to consider when it comes to buying that second home.
One crucial starting point when it comes tobuying a recreational property is knowing how it’s going to be held, meaningwho’s on the title. It’s straightforward if it’s in a single person’s name.
“However, if you’re looking at joint ownershipor trusts, with more than one person—perhaps if it’s two couples buyingtogether—that may open up many other issues, including tax considerations andhow it’s going to be financed,” Ewing says.
Whether you’re considering drawing from theequity in your existing home or using lines of credit, financing options willhave different requirements and time frames involved.
With second homes, the Canadian Mortgageand Housing Corporation (CMHC) has various rules and restrictions related touses—whether the home is strictly for personal use or if it will be rented,Ewing explains. The CMHC does not insure mortgages on second homes;consequently, you’ll need at least 20 per cent down if you already carryhigh-ratio financing on another home.
Once financing is in place, buyers may wantto have it insured. If something were to happen to you or a joint owner,insurance can help maintain the mortgage payments or pay the mortgage off.Without it, the property may need to be sold.
Different types of insurance exist,including mortgage insurance, life insurance, and joint life insurance.
Then there’s the need for liability andproperty insurance.
“Insurance can be an intimidating word, butjust like other financial products you need to understand what the options areand how it can be used,” Ewing says. “It’s an incredible product when usedappropriately. From a financial perspective, if something goes wrong with theproperty or in the individual’s own life, are those safeguards in place?”
It’s crucial to plan for this financialobligation.
Capital gains tax is triggered upon thesale or gift of the property, or upon the owner’s death.
One tax-savings strategy may be using theprincipal residence exemption to shelter the capital gain on the vacation home.“The requirement within the Income Tax Act is not based on where you spend thelargest portion of time,” Ewing says.
Ewing notes that certain capital improvementsor additions that increase the home’s value could potentially reduce thecapital gains tax down the road.
“It’s very specific,” Ewing says. “Considerkeeping a separate bank account for the property and paper trail of what wasspent and get professional advice on how the expenses are classified for taxpurposes.”
If the property is held in one person’sname and something happens to that person, whether it’s death or illness thatrenders him or her incapable of making decisions, no one else may be able tohandle or authorize related transactions without going to court to getguardianship without a will or power of attorney in place.
Having a will also outlines what happens tothe property upon a person’s passing. “Is it going to be passed on to the nextgeneration or is it to be sold? If it’s sold what happens to the proceeds? Youwant to be as clear as you can be,” Ewing says.
“Beneficiaries receive the property aftertax, and there can be a lot of confusion around who’s liable for that taxbill,” she adds. “A will can also address expectations and obligations andrights if kids are meant to share the property. It’s not always about money.”
Nicole Ewing can be reached at Nicole.Ewing@td.com. For more information or to speak with a TD Wealth representative, please visit TD Wealth.
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