You can’t put a price on quality time spent with family and friends. But while owning a cottage is a worthwhile investment, make no mistake—there is a cost associated with it.
Regardless of whether you’re scouring MLS listings for your first cottage, or planning your estate for future generations, here are eight financial mistakes that you’ll want to avoid:
Failing to factor in the cost of maintaining the property when you buy
Mortgage payments aren’t the only expense. In addition to regular upkeep, expect the unexpected in maintenance costs—from a deck that rots, to a roof that suddenly starts leaking.
Turning a blind eye to taxes and legal fees
Michael Bondy, a Certified Financial Planner and CPA, says that buyers also need to be aware that their property taxes will reflect the market value of the property—which is not necessarily the same as the purchase price.
“Often property is not properly assessed at MPAC in Ontario for property tax purposes,” says Bondy, who is a partner at Collins Barrow’s London, Ontario office. “After sale, the assessed value will likely be increased, resulting in an increase in property taxes.”
You’ll also need to take out insurance, which may be more expensive in locations where emergency services are further away, or when the cottage may be vacant for weeks at a time.
Not calculating the time investment associated with cottage ownership
Getting to and from the cottage, whether by car or bus, can quickly eat into your budget—and your time.
And while renting out your vacation property can be a great way to turn a cottage into an “investment property,” there’s a real cost associated with becoming a landlord, including the time spent finding renters and cleaning it between visits. Wear and tear by renters may also depreciate the cottage’s value.
Co-owning a property without thinking long-term
When you’re investing in a property with family, a business partner, or friends, you’ll need to set up financial agreements related to upkeep and maintenance. However, keep in mind that people’s interests and financial circumstances may change.
“Many times, joint ownership with other family members leads to problems, which can sometimes be contentious,” says Bondy. “For example, one wants out, but the other does not want to buy them out or cannot afford it.”
Forgetting to keep track of capital improvements
If you choose to sell or transfer your property, the property value will need to be adjusted, which will include any renovations. Hang on to your receipts and take before and after pictures.
Putting the cottage in the name of your children
While this may be your first impulse, it can lead to complications. In Ontario, cottages are considered family property. This means that if one of your children gets divorced, their spouse may have a claim on it—even if you paid for it.
Instead, it may be advisable to have the property held by a family trust. “However,” notes Bondy, “be aware that the rules have been amended in the recent federal budget to eliminate the use of the principal residence exemption on properties owned by a family trust after December 31, 2017.”
Transferring the cottage without taking into account the tax implications
“Many think there is no tax payable and just transfer the cottage,” says Bondy. However, as of last year, property disposition—including cottages—in Ontario has to be reported on your tax return. Those who transferred cottages without reporting the gain will potentially be faced with taxes and penalties.
Selling to your children for less than fair market value
While it may be tempting to hand over the keys for a $1, you may end up getting taxed twice. The CRA treats transfer of ownership as being made a full market value—regardless of the price you agree to. Not only will your children need to pay tax on capital gain, you’ll also end up paying tax on the full market value.
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