Cottages can be costly. For that reason, some people may consider purchasing one with friends. As the concept of co-ownership rises in popularity, Georgia Swan, Tax and Estate Planner, TD Wealth, joins Kim Parlee to discuss what people should keep in mind before making this move.
* Buying a cottage is a dream for many people, but the huge increase in the price of vacation properties has put this dream out of reach for some, unless you maybe consider purchasing a cottage with a friend. As the concept of co-ownership increases in popularity, what should people keep in mind before making this move? Georgia Swan, tax and estate planner-- TD Wealth joins me now to discuss. So is this a good idea? Because financially, for a lot of people, this is a great idea.
* So if it's a good idea or not depends on one fundamental issue. Put aside the friendship at first, because make no mistake, this is a business transaction. And the truth is, if you don't treat it as a business transaction right from the beginning, it can go all kinds of horribly wrong. So put aside the romanticism and the excitement of getting that cottage and the wishes and dreams of all the things that have to-- that might happen there, and start off as if you are starting a business, because now, with the price of cottages, we could be talking millions of dollars.
* Before we get into that-- what you need to be thinking about, give me an example of how these things can go horribly wrong. Because if you're someone buying a cottage and maybe three people want to go in and buy a cottage worth $1 million, that's a pretty sound investment. It's accessibility, which is very exciting for people. But the flip side is what?
* The flip side is not going into it with a clear plan about how that cottage is going to be managed and how you are all going to use it. So I had clients once where, basically, it was an idea of who gets what weekends. And they hadn't really worked that out. So it was just people going, OK, I have dibs to this weekend or that week. And it started resentment, because people, for example-- or owners that could plan months and months in ahead seemed to be able to get all the best weeks, and other people who, for example, in their lives were not able to plan so far in ahead about when their vacation was going to be were relegated to not-so-great weeks or weekends. So that was one of the big issues.
* Or the expenses. You want to add on deck. Someone else doesn't want to. You want to sell. Someone doesn't want to. Anyways, all the good stuff. OK, so what kind of conversations-- you said start as a business transaction. What do you need to talk about?
* First of all, your budget. How much are you able to expend towards purchasing this cottage? Figure it out with the friend you're going to buy it with and stick to it. This can be especially important if the two or three or however many people who are buying the cottage have different financial means. Somebody might be more willing to exceed the budget because they found the perfect place than somebody else.
* And within that budget, also, you have to consider-- it creates an inequality as well if, let's say, you have to borrow the money in order to put your share of the down payment down, where somebody else actually has it. So budget, budget, budget. And then you have to get an agreement together about how it's going to be used, how those repairs are going to be done, where the money is going to come from. If one person buys a boat, can everybody use the boat? The dates that you're going to go up there. All of those day-to-day issues have to be worked out ahead of time, because if you can't work that out in an agreement, then maybe you shouldn't be owning this property together.
* Yeah. What kinds of co-ownership legal structures are available?
* So the two main kinds of co-ownership of real estate is joint tenants with a right of survivorship or tenants in common. So that first one-- joint tenants-- I call it the last man standing-- the idea that basically if you and I owned a cottage together and I passed away, then the cottage would automatically go to you. You don't see that very often when two friends own a cottage because each person may want to leave it to their spouse or to their children, so usually, you'll see it as tenants in common. It might be an equal interest. It might not. It might be that somebody owns 75%, the other person owns 25%, but they can deal with their share independently of the other.
* But there's another thing to agree about. If you have, for example, the idea that, all right, if I pass away, the cottage is going to my children. My co-owner should be thinking, do I really want to own the cottage with this person's children? What does that look like? So the transition of the cottage to the next generation or decisions around sale are also something that you need to think about right from the beginning rather than waiting until an event requires it.
* What about taxes? Because for many people, this is not going to be their principal residence.
* No. That's a big one. So for a lot of people, it's going to be a secondary residence, so the principal residence exemption may not apply because they have another home to which they want to apply it to. So that becomes another issue. When it transitions to the next generation, if one of the owners has a huge tax bill that can't be maintained, then that might be a problem. And so the people inheriting it say, we may not be able to afford to keep it. So then you're looking at sales. Does the surviving owner want to buy out the other people? So that can be a huge issue.
* Yeah. And the whole thing about if someone decides-- say two or three people buy a cottage and one person wants out. Unless the other owners want or can buy out the other person, there's not a lot of other people in the world who are going to say I want to buy 33% of this cottage with these other people.
* Absolutely. So the only recourse is to court. There's a particular court action called partition and sale, where basically, everybody will be forced to sell the cottage if they cannot buy out that other person.
* So for someone who's thinking, and they're like, they say, I hear you, Georgia, but I want to do this. Where's one of the first one or two things they need to do and think about?
* Well, certainly you need to sit down with the person you're thinking of buying the cottage with and try to articulate as many of the issues that could come up that we've talked about today. Even if you sit down and put some thoughts down on paper and then start looking, that can go a long way. But eventually, do yourself a favor. Go to a good lawyer that practices in the areas that you're looking at-- so has some experience with cottages-- to get that agreement in place, because I've seen so many cottages basically lost and all the good memories tainted because the people that own them couldn't come together when it was important for them to do so.
* So the roof needed fixing, and they couldn't even decide who was going to pay for it. Or one person pays for it, then the other person feels beholden. All of those things can cause tensions between the owners. And that's what not what you want to have when you want to go up to the cottage. You want to think of s'mores and tube rides, not who's going to fix the roof.
* Yeah. Georgia, Thanks so much.