Marie has a photo over her desk — it’s an old-fashioned family picture and she keeps meaning to scan it. Just like the photo is from a different time, so too are the people in the picture as they celebrate the new, hand-built dock perched above the lake. Poppy, with his old fishing hat on, his mouth comically overflowing with nails, is pretending to hammer in the last one held by Marie’s mom. She’s heavily pregnant but oblivious that her stomach’s popping out of a plaid workshirt, and laughing so hard you can’t see her eyes. Marie never saw her mom with hair that long — only in pictures — she looks so young, which of course she is, 22-years-old in the summer of 1965.
Poppy’s long gone and so is the dock he made that year. The shoreline has changed but the pines in the background still thrive.
Next summer will be my last summer at the cottage, Marie thinks, half-hoping it isn’t true.
Few things give Canadians more joy than our summer homes, our cottages, and camps, our refuges out of the city and in the woods where the beauty of the scenery and the quiet of the forest rejuvenate us.
But nothing lasts forever. The girl who fished off the dock is living a thousand miles away. Her brother who lived in a summer treehouse is putting every extra cent into paying off his mortgage. Even real estate changes; depending on price trends, the old cabin in the woods may now be worth several million dollars and that value may outweigh any sentiments attached to the place.
Naturally, our deep affection to the cottage sometimes distorts our perspective when it comes to the thought of selling it. How can you sell the cottage that was a summer paradise for generations of children and where the deer visit without fail by Canada Day? Parents and grandparents may wonder in exasperation at the thought that the next generation may plan to sell. WHAT?!?
Selling Your Memories
Rob Serediuk, a sales representative from Chestnut Park’s Cottage Country Team, who deals almost exclusively with cottage sales in Ontario’s Haliburton and Muskoka areas, says he sees this sentiment many times with people who have owned vacation properties. He says he once saw a woman cry as she finally signed the documents that put her cottage up for sale.
“How many people in the city do that?” he says.
“It’s hard because you put so much blood, sweat and tears into it,” Serediuk says, “and so many good memories.”
But if you can take the emotions out of selling, it could work to your benefit.
“Sellers who have a high emotional attachment to their property will literally list at a price 20% higher than what an agent recommends because they feel they have the best cottage on the best lot in the whole of cottage country,” he says. And overpricing your property may do nothing but delay a sale.
"The thing (cottage sellers) have to understand, at the end of the day, is this is a business transaction."
Serediuk says over-pricing the market could mean dropping the price in six months’ time, and perhaps again in another six months while the reluctant sellers experience anxiety and doubt over both selling . . . and not selling the cottage.
In the meantime, if the market is falling, they may have missed an opportunity to sell at higher price.
If you are going to sell, remind yourself that the amount of money you’re willing to give up your treasure for may be out of whack with current prices and trends in the same area, he says.
Tax and Family Considerations
Jason Uppal, High Net Worth Planner, TD Wealth from Edmonton, sees a similar situation. He says one of the problems of passing a cottage on from one generation to the next is that the owners often have unrealistic expectations about how deeply future generations will feel about what they are passing down.
He should know; while he spent his summers as a child at the cottage, he has no interest in owning one and would prefer to spend his vacations travelling.
Uppal says adult children may love the property as much as their parents but may be unable to visit as much as they would like. Or they may not be able to keep up with the maintenance or may simply think paying property taxes on a place they rarely visit is not such a great idea. Despite the great memories, the beloved cottage could quickly turn into a burden, especially if the only reason anyone hangs on to it is to honour the memory of their parents or grandparents.
Moreover, if the parents who own the cottage have not prepared their personal finance affairs properly, their children may not even have the means to pay the taxes once the property is passed down, making a tough situation more difficult. Uppal says he knows some lakeside properties in Kelowna, B.C. have annual property taxes of $10,000. Likewise, a patch of forest bought in the boonies 40 years ago may now be a luxury location and the inheritors of the cottage may be looking at a large capital gains tax bill from the CRA when the cottage changes hands.
For those who do want to inherit the cottage, a tax management plan may help them.
“A lot of people are surprised to find out that there are not a lot of options for passing down this asset tax-free to their kids and delaying the tax implications for another 20 years,” Uppal says.
Different Generations, Different Attitudes
Uppal says that people who want to pass on their cottage may consider adding family members to the deed of the property — making them co-owners — or taking out life insurance as a method of managing the taxes.
He says that often the second or third generations of a family have different means and outlooks towards a vacation home, and even between siblings there could be widely different attitudes. One sibling could be as devoted to the cottage as their parents were and wouldn’t think of giving it up, one may have perfectly sensible reasons for selling the cottage, while a third may love the place but not have the money or the time to give it the love it needs.
Uppal says, “the thing they have to understand, at the end of the day, is this is a business transaction.”
Serediuk has seen many similar situations in Ontario’s cottage country. Since Toronto-area real estate is so expensive, even if the adult children have moved up the real estate ladder with their own homes, they may not be in a position to have funds to take on another property.
Take the Emotion Out
Once the cottage has been passed down to a new generation of family members, there may be other issues; who gets to referee when people visit? How are maintenance priorities decided? What happens if your cousin says he’ll pay you back for the new deck . . . but never does?
Uppal says the situation often comes down to people having to treat relatives as business associates in emotionally-charged situations around the kitchen table.
The difference of course is that if they break your heart by making you sell the cottage, you may still see them at family gatherings for the rest of your life.
“It’s a common issue with siblings quarreling, family members not trusting family members and now they all have to be partners in this shared asset,” Uppal says.
"It's a common issue with siblings quarreling, family members not trusting family members and now they all have to be partners in this shared asset."
Uppal says that communicating your intentions as early as possible is a great method of giving everyone involved a heads-up that an inheritance plan may not really work out. Situations where the family never talks about tax issues or a son or daughter who never expresses what they really want may take everyone by surprise when the owner passes away.
Uppal recalls one client who foresaw trouble ahead and took preemptive action. The man was a business owner who bought some vacant land several decades ago but now the cottage he lives in is worth more than $4 million. The problem is that his family has changed since purchasing the patch of forest so many years ago. He has remarried and is estranged from a son from his first marriage and wants to pass the property onto the daughters of his second wife.
He did not want any trouble from his son who may challenge his father’s will to gain an interest in the cottage.
Uppal says the solution was to create a trust which stipulates who has the use of the property. In this way, the owner’s intentions will be upheld, plus, a trust may be able to delay a tax bill on the increased value of the property.
“This guy was smart. He did some proactive planning,” Uppal says.
Uppal says owners should not presume that a son, daughter or great-grandchild will naturally be able to care for the cottage like they have. And if you are presuming, then simply ask that younger relative if your plans and their plans are the same.
Uppal says there are other means to keep the family happy. If the cottage owner wants to pass it down to the next generation but realizes one of his or her kids may not be able to maintain it or may actively canvas to sell the cottage once they inherit it, there is a creative option. If the cottage owner has other assets that heirs will receive (assets in RIFs, investments, cash, etc.) these more liquid assets could pass to the child who might prefer cash. In this way, the siblings who want to own the cottage, get to own the cottage.
Communication is Key
“I find that often a lot of the parents don’t really sit down and see if everybody is on the same page. You might find that the kids are more than okay with selling the cottage and taking some capital and using that to pay off their mortgage or for their kids’ education or for vacations and stuff like that,” Uppal says.
But not all plans are appropriate to everyone. Uppal says there is no point making an estate plan around the cottage if the cottage has to be eventually sold to pay for healthcare costs of the original owners. He says that when he meets with clients, he quantifies their entire assets and then projects where they may be 10 and 20 years into the future.
Once a cottage-owner is aware of what kind of financial shape they may be in down the line, only then should they make decisions about around whether their children want the cottage and if they are in a state to help the kids with the tax burden and subsequent costs.
Buying and selling real estate is complicated and selling a family property adds a stressful layer of emotion to it. If you are in this situation, talk to financial professionals who can help you develop a strategy that is appropriate and suitable for you and your family.
— Don Sutton, MoneyTalk Life