Reduce tax impact by deducting cost of improvements
Province
Lovely old cabin in the Yukon
TORONTO — With baby boomers scouring the country looking to buy cabins and recreational properties, you may be tempted to sell that slice of summer paradise that has been in the family for 40 years.
But it’s not a slam dunk, even if you’re in a desirable part of cabin country, with strong demand and a bustling regional economy.
Before putting your property on the market, you have to decide whether to sell privately or list it with a real-estate agent.
And how do you show it when you’re hundreds of kilometres away and visit the cabin only once or twice a month?
Cashing in on rising demand and booming prices for cabins could also produce a major tax headache.
Let’s hope you kept all those bills years ago when you put in a new septic tank, remodelled the bathroom or built a new dock for the boat. You’ll need them.
Unlike your home, a cabin faces capital-gains taxes if it’s sold for a profit. Federal tax changes in recent years have reduced that amount to 50 per cent of the gain, but you’re still talking tens of thousands of dollars in potential new taxes.
Still, there are ways to minimize the tax hit, but you have to be organized.
“Selling a cottage is tricky and you’ve got to do your homework,” says Douglas Hunter, author of The Cottage Ownership Guide, a book chock full of tips for buyers and sellers of recreational properties.
“With capital gains, you almost need to be planning to sell it from the day you buy it. Over time there are any number of things that are improvements to the cottage you can use legitimately to offset the appreciation of the property.
“Considering how much property prices have increased over the years, anything you can grab on to that reduces the capital-gains impact is really important.”
A capital gain is the difference between what you get from the sale of a property and what you paid for it. Capital gains don’t apply to your principal residence — your home — but kick in for cabins, income-producing apartments or other second properties.
So, if you sell a cabin that cost $50,000 about 15 years ago for $250,000 today, you would face a $200,000 capital gain. That translates into a $100,000 increase in taxable income you would have to report on your income taxes next spring. That could mean a tax bill of more than $25,000 or more.
Even if you transfer ownership of the cabin to your son or daughter to avoid the hassles of a sale, it’s called a deemed disposition, with capital-gains-tax implications as well.
But there are deductions you can make to reduce your capital-gains exposure. You can deduct what you paid to add value to the property — everything from a new roof or extra bedroom to a new septic tank — even landscaping.
If over a decade, you spent $50,000 in
materials and professional labour to improve the cottage — and you have receipts to prove it — you can deduct those costs from your capital gain and cut the tax hit by thousands of dollars.
The problem is that you have to have receipts, cancelled cheques and bills of sale to show the Canada Revenue Agency if they carry out an audit. Work you’ve done yourself can’t be included.
“You can claim the materials you use to perform work, but you can’t claim your own time,” says Hunter.
“You can’t say you’re worth $80 an hour and put that against the capital gain.”
Recent reports from major real-estate brokerages suggest that sales of cottages and luxury recreational properties will soar this spring and summer as affluent baby boomers push up demand across the country.
Western Canada’s energy-rich economy has seen the biggest increases, with starting prices topping $500,000 in nearly a third of the markets surveyed by the Re/Max brokerage.
“Baby boomers are investing in the future — from both a lifestyle perspective and an economic standpoint,” says Elton Ash, regional director of Re/Max of Western Canada. “Tremendous equity gains have been realized in recent years as demand for recreational properties across the country swells.
“Given the aging of the population, this trend is expected to continue for at least the next five to 10 years as baby boomers move through the cycle.”
While the financial implications of capital gains is the biggest headache for cabin owners, Hunter says the practicalities of how to go about selling the property are also top of mind. While the Internet has helped get wider display of properties and help attract new buyers, it’s advisable to hire a knowledgeable real-estate agent to help price the cabin properly and show it when you are away.
— Canadian PressTORONTO — With baby boomers scouring the country looking to buy cabins and recreational properties, you may be tempted to sell that slice of summer paradise that has been in the family for 40 years.
But it’s not a slam dunk, even if you’re in a desirable part of cabin country, with strong demand and a bustling regional economy.
Before putting your property on the
market, you have to decide whether to sell privately or list it with a real-estate agent.
And how do you show it when you’re
hundreds of kilometres away and visit the cabin only once or twice a month?
Cashing in on rising demand and booming prices for cabins could also produce a major tax headache.
Let’s hope you kept all those bills years ago when you put in a new septic tank, remodelled the bathroom or built a new dock for the boat. You’ll need them.
Unlike your home, a cabin faces capital-gains taxes if it’s sold for a profit. Federal tax changes in recent years have reduced that amount to 50 per cent of the gain, but you’re still talking tens of thousands of dollars in potential new taxes.
Still, there are ways to minimize the tax hit, but you have to be organized.
“Selling a cottage is tricky and you’ve got to do your homework,” says Douglas Hunter, author of The Cottage Ownership Guide, a book chock full of tips for buyers and sellers of recreational properties.
“With capital gains, you almost need to be planning to sell it from the day you buy it. Over time there are any number of things that are improvements to the cottage you can use legitimately to offset the appreciation of the property.
“Considering how much property prices have increased over the years, anything you can grab on to that reduces the capital-gains impact is really important.”
A capital gain is the difference between what you get from the sale of a property and what you paid for it. Capital gains don’t apply to your principal residence — your home — but kick in for cabins, income-producing apartments or other second properties.
So, if you sell a cabin that cost $50,000 about 15 years ago for $250,000 today, you would face a $200,000 capital gain. That translates into a $100,000 increase in taxable income you would have to report on your income taxes next spring. That could mean a tax bill of more than $25,000 or more.
Even if you transfer ownership of the cabin to your son or daughter to avoid the hassles of a sale, it’s called a deemed disposition, with capital-gains-tax implications as well.
But there are deductions you can make to reduce your capital-gains exposure. You can deduct what you paid to add value to the property — everything from a new roof or extra bedroom to a new septic tank — even landscaping.
If over a decade, you spent $50,000 in
materials and professional labour to improve the cottage — and you have receipts to prove it — you can deduct those costs from your capital gain and cut the tax hit by thousands of dollars.
The problem is that you have to have receipts, cancelled cheques and bills of sale to show the Canada Revenue Agency if they carry out an audit. Work you’ve done yourself can’t be included.
“You can claim the materials you use to perform work, but you can’t claim your own time,” says Hunter.
“You can’t say you’re worth $80 an hour and put that against the capital gain.”
Recent reports from major real-estate brokerages suggest that sales of cottages and luxury recreational properties will soar this spring and summer as affluent baby boomers push up demand across the country.
Western Canada’s energy-rich economy has seen the biggest increases, with starting prices topping $500,000 in nearly a third of the markets surveyed by the Re/Max brokerage.
“Baby boomers are investing in the future — from both a lifestyle perspective and an economic standpoint,” says Elton Ash, regional director of Re/Max of Western Canada. “Tremendous equity gains have been realized in recent years as demand for recreational properties across the country swells.
“Given the aging of the population, this trend is expected to continue for at least the next five to 10 years as baby boomers move through the cycle.”
While the financial implications of capital gains is the biggest headache for cabin owners, Hunter says the practicalities of how to go about selling the property are also top of mind. While the Internet has helped get wider display of properties and help attract new buyers, it’s advisable to hire a knowledgeable real-estate agent to help price the cabin properly and show it when you are away.
