A vacation property can truly be one of the most enjoyable purchases you ever make. Whether it’s a cottage on the lake, a cabin in the woods, or a chalet near the slopes, vacation homes are the perfect spot to make lasting family memories and enjoy much-needed rest and relaxation! However, now that you’re nearing retirement, you will likely find yourself considering all your financial options. Maybe that beloved vacation home just doesn’t fit in to your plans anymore. While your family may love the cottage, you might be leaning towards selling it. So, do you pass it down or put up that “for sale” sign? Before you make a decision, make sure you know your options.
For some retirees, their cottage or vacation property is half the reason they retired, and they can’t wait to spend more time there. If you know you’ll be keeping it in the family for many years to come and want to enjoy it as much as possible, then leaving it to your family in your will may be a great option.
Further, this vacation property can become your main residence upon retirement, depending on the location and year-round suitability, as well as your personal and financial goals. This way, you can sell your current, primary residence and free up some money for your retirement while you enjoy life in your treasured vacation home.
Leaving your vacation home to your family in your will
Leaving property in your will can have a number of implications that may deter you or your family from doing so. When passing it down, your property becomes subject to the probate process as well as any applicable fees or capital gains tax associated with it; these costs can be significant. Often, this makes keeping that cottage or vacation home financially unattainable for the beneficiary.
Consider this example:
In your will, you choose to pass down 2 properties to your children. One child will inherit your primary residence & the other inherits the cottage or vacation property. Let’s assume both properties are valued equally at $500,000.00. On paper, this may seem like a fair distribution of your properties. However, your primary residence will pass without tax whereas your cottage will be subject to capital gains (taxable at a rate of 50%) and your beneficiary will be responsible for any maintenance and future property tax associated with the cottage.
In order to offset the costs associated with passing down a vacation property, it is recommended that you purchase an appropriate life insurance policy to help cover any mortgages, capital gains tax, or ongoing property costs. When drafting up your estate plan, be sure to talk with a professional financial advisor as well as your beneficiaries to make sure this property is something that they want and can afford.
Selling your vacation property
Although it may be a difficult choice to make, sometimes selling your recreational property is the most financially sound decision. This allows you to liquidate this large asset and invest it into your retirement savings, allowing it an opportunity to grow. Keep in mind that, should you decide to sell, your property may be subject to capital gains taxes applied to its growth in value during your ownership, unless it’s designated as a principle residence. It’s best to speak with a financial advisor about any applicable fees you may be on the hook for ahead of making a decision.
How to manage your vacation property can be a tricky decision when it comes to your retirement plan. For some, selling the property makes the most sense while for others, passing it down to your family as part of your estate plan is the ideal choice. No matter what you choose, base your decision on what is financially sound for you. Your first step in this decision is calling Darryl Smith of Synergy Life Financial. Darryl will review your current life insurance and other options with you to help determine a route that meets your retirement goals! Call Darryl today at (705) 424-0562 to get started.