Offset Capital Gains On Your Cottage

by Tax Guy - Burlington Accountant on October 28, 2009 Print This Post Print This Post

A friend recently asked me about the best way to deal with the income tax that will need to be paid when his parents eventually pass away.

The most common way to offset this future tax liability is through the use of insurance and have I written about this strategy in Planning For The Family Cottage. However, there is another strategy that can be effectively used, provided you have all the receipts!

Keep Your Renovation Receipts

When you pass away or sell your cottage or vacation property, you generally cannot claim the principal residence exclusion and the sale attracts the tax on capital gains. If you have done renovations to your vacation property, you have increased the “adjusted cost base” of the property and this can lower the future capital gain.

peeling-paint

An Example

If the cottage you originally paid $20,000 for is currently worth $250,000 you will have to pay tax on 1/2 of the gain (or $115,000 will be added to your income tax return). If you live in Ontario and are in the top tax bracket, the tax bill could be over $53,000.

However, if you made improvements to the property over the years, the cost of these improvements can be added to the original $20,000 cost to offset the gain.

Assume that over the years you replaced the roof a, added an addition and build a new boat house. If the total cost of these improvements over the years amounted to $35,000, you will have reduced that future tax bill by more than $8,000.

Clearly keeping the receipts is essential when making improvements to your vacation property.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

Print This Post Print This Post

Comments on this entry are closed.

Previous post:

Next post: