Part 1 of 4 parts
There is very little property that provokes as great a range of emotional reaction as the inheriting, transfer or sale of the family vacation home, be it summer cottage, ski chalet, or country hideaway. A vacation home is a place we imbue with memories of great vacations, time away from the day to day grind and family get-togethers.
It is understandable that discussions about selling it or giving it to one or more of the next generation can often result in the presence of bitterness and unhappiness in the family.
The reality is that if you own a place that has become the gathering place for family vacations, you need to face the fact that at some time the property will be disposed of, whether on your death or earlier if you need the funds or no longer use the property.
There are a lot of things that you can do to reduce the friction in your family but it means preplanning and taking action. It also means being willing to have what may be some uncomfortable conversations with your family members. Over the course of a few articles, I am going to outline what I believe are some basic do’s and don’ts when it comes to the family vacation home, based on more than 35 years of experience in helping families with the thorny issue of what happens to the vacation home.
Understanding your Vacation Home’s Financial Value, Warts and All
The first step in thinking about any kind of transfer of your vacation home is to understand what the net amount you will have left once you sell or transfer it.
The value of your vacation home is more complex than what someone will pay you for it if you wanted to sell it. There are tax implications that must be considered, including its market value today, what you paid for it originally, what you have spent on it to increase its capital value, what you will have to do to make it saleable, and what you will pay in capital gains if you sell it, to name just a few tax-related headaches.
It becomes more complicated if it has been in the family a long time and you don’t have the receipts for all of the construction material you used when you renovated, or if you paid a contractor in cash and don’t have invoices to back up what your investment has been. There have also been changes in tax legislation from time to time that directly impact capital properties and since most vacation properties Canadian’s own are second properties for at least part of the time the vacation home is owned, the vacation home is usually subject to those changes and taxes.
Environmental issues, encroachments, and legal access are three things that can impact the value of your vacation home significantly and are not necessarily caught by a standard appraisal. In fact, usually, the appraiser clearly indicates in the report that these items were not considered as part of the opinion of value being provided. Historically, abandoned home heating tanks buried in the foundation or on the property are common if it is an older property. There may be activities on neighbouring properties, currently or in the past, resulting in contamination on your land.
It is also not unusual for access to the property to be over private roads, which access has never been legalized on the title and exists on a handshake. Then there are your driveways, corners of buildings and docks that are on your neighbours’ property with everyone having an understanding that the encroachments are fine but no formal paperwork.
These three things alone have been the subject of significant litigation in recent years and it will only continue to escalate as the current owners of vacation properties sell or pass these properties on through inheritances. What was acceptable between people who knew each other and accepted the problems often are not acceptable to the new owners.
Why does all of this matter and why is understanding the true net value of the property the starting point of the do’s and don’ts for vacation home disposal? What it will do is force you to look at your property objectively and without the rose-tinted memories of your son’s first plunge in the lake or your daughter’s first competitive ski race making you forget the title issues or the property line dispute with your neighbours.
It will also force you to look for the paperwork you have buried in a variety of boxes that your children might never find. It gives you a chance to talk to an appraiser to get a realistic starting point for price, a tax accountant to understand the quality of evidence and information you are going to need to establish tax values and a lawyer to see if and how the access and encroachments can be legalized.
It can be done now, while you are alive and have the knowledge and history of everything. It is hard for people to put this kind of information together after the next door neighbour has died and his children are selling the property or for your children to do the same after you have passed.
Tackling these kinds of things now, before you have to sell or are no longer capable of providing the necessary history, is a very positive first step and will provide the clear, objective information you need to make the next decision- do I sell, gift in my lifetime or through my Will and to whom.
In summary, the first step do’s and don’ts:
Do retain the services of an appraiser to get an objective baseline of value for your vacation home. An opinion of value from a licensed real estate broker is an option at the very beginning of the process as an alternative but will not satisfy CRA usually.
Do pull all of your paperwork from the purchase, including subsequent adding or deleting of names on title, and any improvements you have made, any permits, letters relating to encroachments, correspondence with neighbours or the municipality, surveys, proof of contribution to maintenance of any access roads, or joint use facilities like docks or wells
Do make a written history of land uses on your property while you have owned it and for neighbouring properties and document any disputes, including ones that were resolved that affect your property.
Don’t use the assessed value for municipal tax purposes as market value for the property.
Don’t assume just because you have always used a road to get to your property that it somehow has become legal and will be a right that passes with the property
Don’t assume everyone knows and will remember the agreement about your septic system being located a few inches or centimeters over on your neighbour’s property because it meant you didn‘t have to dig out a large rock and saved you a lot of money
Written by: Robin-Lee Norris -RLNorris