Seeking to purchase or promote a cottage? It could be extra sophisticated than you assume

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Fall is the perfect time to consider buying a vacation home or selling one you already own next spring

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Diana Orlic, Financial Mail Special When considering buying a vacation home, the first thing to consider is whether it makes financial sense or not.When considering buying a vacation home, the first thing to consider is whether it makes financial sense or not. Photo by Getty Images / iStockphoto

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To most of us, it sounds like perfect luck owning a waterfront family home. We imagine sitting outside on the dock and enjoying the sunrise with our morning coffee, paddling around in the afternoon or enjoying the sunset with a cold drink. The reality is, these moments come at a price, and are often hard earned after hours of waiting and being on the highway.

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Therefore, I advise clients to carefully examine their financial situation, lifestyle, and expectations for owning a vacation home to ensure that it is a good fit. Demand is currently skyrocketing, but this is largely a consequence of the pandemic and not necessarily sustainable. When advising families looking to buy or sell a recreational property, both financial and practical considerations must be paramount.

The first thing to consider when buying a vacation home is whether or not it makes financial sense, considering all of the various factors that go into owning a vacation home. For example, do you only use it for the family or rent it out when not in use so that it becomes an income generator?

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As with any property, there are additional costs to consider, e.g. B. Property taxes and maintenance, but with the added complication that depending on the location of the cottage it can be more difficult and costly to find a contractor. Last year, customers also suffered from inflationary costs such as lumber due to delivery problems. And there is the cost of gas as well as other costs duplicated from your primary residence such as hydro, cable, internet, heating, home insurance, and consultancy fees. All of these costs add up. Not to mention amenities for the house itself, like life jackets, canoes or kayaks, and possibly a motorboat.

Maintaining a hut can be expensive. Maintaining a hut can be expensive. Photo by Chloe Cushman / National Post Illustration Files

Once we determine that owning a cottage is financially feasible, let’s look at the time frame and some of the softer issues. Every family is different and has its own needs, dynamics and challenges. You should consider the various facets of your family structure to avoid possible family problems. Having a team of advisors such as financial advisors, accountants and lawyers at the table can help keep track of things and focus on the various scenarios and key issues.

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This team can work together to put together the best structure and moderate family gatherings to ensure the difficult conversations take place. For example, would your children want to own the cottage? Will this be cross-generational (is it even possible to determine that from the start)? How do you approach who will inherit the property? Do you make a property balance or sell to the child who has shown the greatest interest? It is important to take emotions out of the decision-making process as much as possible, but I also know that these are spaces of cherished memories and can be an element of nostalgia.

Of course, there are the softer, but equally important questions such as: Are you satisfied with the amount of driving required? Ready to forego a vacation outside Canada for the sake of the cottage? Will you feel like you are giving up the city activities to go to the cottage? You want to make sure that owning a vacation home fits both your budget and your lifestyle.

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Cottage owners who wish to give ownership to their children also need to consider the implications for their overall estate planning beforehand. Whenever something changes in relation to a life event, think about how it will affect your current lifestyle and retirement.

Unlike your home, your vacation home is considered an investment with significant tax complications that require advance planning before selling. There are several ways you can go about this, including designating your vacation home as your primary residence or starting a living trust.

However, the most efficient way to do this is to take out joint life insurance. This is cheaper than individual life insurance and means that couples who own leisure property are paid out the benefit in the second death. At this point, the insurance benefit is paid out to the beneficiary or estate, with cash provided to pay for capital gains.

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In the best case scenario, a cottage can provide the much-needed comfort and take a break from hectic city life. There are many factors that need to be considered before making a purchase, but the main thing is that owning a recreational property should not ultimately create financial difficulties or family tensions.

If you want to invest the time and money, you want to make sure that it is for your loved one and in the place that suits you best. A great way to do this is to rent in the area in the summer and do a test run with cabin owners. This is a great way to gauge how much work it takes to own a cottage, whether it fits your lifestyle, and whether your children are interested in inheriting a cottage.

Diana Orlic is a portfolio manager and investment advisor at Richardson Wealth.

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