...to a family member?
Pretty often, cottage properties carry with them lots of happy memories. Good family times at the cottage. Maybe the cottage has been held in the family for some generations. Maybe the cottage was the one “constant place” where family returned summer after summer, while other family homes in the city were bought and sold.
Cottage properties can have all kinds of legal problems attached to them.
Road access issues. Shoreline allowance issues. Environmental restrictions on changing shore lines when the property is located in an ecologically sensitive area.
And there are almost certainly tax issues relating to the transfer of a cottage property. Is the cottage the “principal residence” of the vendor (often a parent?) A vendor family unit (married husband and wife) can have multiple “matrimonial homes” for family law purposes, but can now have only one principal residence for tax purposes. However, that rule changed in 1982: if the cottage property was owned before 1982, you need tax advice from an accountant on how to deal with the pre-1982 portion of the increase in value.
If the cottage was not a principal residence before 1982 or at the time of the sale, there will be capital gains tax issues to be sorted through.
If the cottage was used as a rental property, producing income, then there are further tax issues to be addressed: although it may be you can also write off some of your maintenance and other costs. Again, tax expertise is absolutely essential.
If you’re the parent wishing to sell to one or more of your children, you may be tempted to set a price below market value to help them out. Not a good idea, unfortunately. You are likely to be deemed to have sold the property at fair market anyhow, but the purchasing child will also be deemed to have acquired the property at the lower price. Double tax hit . . . not the effect you wanted to achieve. Maybe a forgiveable promissory note for the difference between the fair market value and the price received can bridge this gap.
Is the child to whom you’re transferring the property married or cohabiting? If it’s the intention of the transfer to keep the cottage “in the family” then has the “buyer child” protected the property with a cohabitation agreement or marriage contract in the event the relationship breaks down in the future? It’s a tender issue to raise with your acquiring child: but given the rate of relationship breakdowns, you may want to risk raising it anyhow.
And: what about the estate planning consequences? Do you have other children whose noses may be out of joint because one “favoured child” is acquiring the beloved family cottage . . . . and they are not? You certainly don’t want to create the potential for estate litigation in the future: and you might think the best route is for all the interested children to acquire the property.
But if you are transferring to more than one of your children, what kind of "shared use agreement" would be optimal for them to put in place to address predictable issues? Such as ongoing costs for property taxes, insurance, major repairs and seasonal opening/closing? Will there be a week-about time schedule? Have they considered perennially contentious issues like restocking basic groceries and dump runs? Do all the kids involved in the purchase have appropriate domestic contracts in place?
Lots to think about . . . certainly not all legal issues. At Anderson Adams we want to help you be sure that the transfer of that beloved family cottage is well thought-through. You will quite likely need more than legal help in your quest to maximize the likelihood your cottage will continue to be that magical place where happy family memories deepen and grow over the generations and decades to come.
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