By Team Member Angela Balan
A couple of weeks ago, the Federal Budget announced changes to how capital gains will be taxed. I’m no tax expert, but here’s what I understand to be the case. While principal residences remain exempt from capital gains taxes, other investments like cottages are not. As of June 25, 2024, the “inclusion rate”, will rise from 50% to 66.7%. The first $250,00 is tax-free. IF a cottage seller realizes more than $250,000 in annual capital gains, the tax kicks in. Recreational property realtors across the province are all weighing in.
To sell or not to sell? That’s the big question family cottage owners are asking right now.
How will capital gains changes affect cottage owners?
For anyone who is trying to get their property sold and the transaction closed before the June 25 deadline, their listing should be going up as soon as possible. And, that’s a tall order. Cottage owners are in clean-up mode after the winter, tidying up their property, removing downed trees and getting ready for the summer season. The timing of the budget’s release is tough for those who may want to beat the new tax rules.
I’m on the side of many industry experts. Folks should not rush into selling. As in all cases, take some time to sit down with a tax accountant. Figure out exactly how much a sale would be impacted by changes to capital gains — if at all.
For an owner to pay higher capital gains on the sale of their cottage, they would need to realize a net profit of more than $250,000 on the sale. In the case of joint owners, like a married couple, those proceeds would have to top $500,000 to face higher capital gains taxes.
Anyone who bought a cottage in the past five or so years likely won’t be seeing that much appreciation if they’re thinking about selling today. Instead, the impact will likely be greater on someone older who bought or inherited a cottage at a very cheap price 40 years ago and could be selling for $1 million today.
It’s a trade-off – patience might be best
Getting a quick sale in today’s cottage market might mean offering a significant discount on the price. Can a seller save more by compromising on price to beat the capital gains taxes, or instead, get the valuation they had in mind by giving the property the proper exposure on the market? The wisdom is that you’d probably have to price so aggressively that it would offset any potential losses or extra taxes you’d be paying.
At the end of the day, none of us wants to pay more taxes but rushing into a cottage sale could be a mistake – with lots of money being left on the table. Do we expect to see a surge in listings in May and June? Not really. As always – if you can get your right price at the right time, go for it.
Passing down the cottage may be the exception
Doing the math should prove that patience makes sense – perhaps with at least one key exception. Anyone who owns a cottage and has been considering passing the title down to the next generation might be wise to do that before June 25th. However, even if a deal is done for a nominal fee or without cash changing hands, capital gains will be realized on the transfer based on the price of the property when it was purchased (or inherited) – compared to the market value today.
So, if you are passing your cottage on to a family member, pay for some competent help – ASAP. This will likely involve getting a professional appraisal done to determine the current market value versus the “original value” and get clarity about capital gains implications. It could really add up.
And remember – if you do the transfer now – you owe the taxes now.
Tight cottage inventory this year
One recent report suggested that nearly 65 per cent of cottage owners surveyed are planning to hold onto their properties in 2024 – before the capital gains tax changes were announced. And, experts are sticking to that forecast.
For our family, the cottage is less of an investment and more of our second home. While the recent Federal Budget had people thinking that cottages would be the first thing to go, that’s hardly the case for many. We certainly won’t be selling our waterfront property any time soon! But as always, if you’d like to start exploring a purchase, the timing just might be right. I’m here – and ready to help.
