Tax Tips for a Second Property

People buy a second property for many reasons. Some dream of getting away on the weekends and sitting on the dock over the lake. Others might decide that instead of paying our rent for their child’s accommodations while in university, they prefer to purchase an apartment or condo and hope to see a return on this investment. Regardless of the reason for purchasing this property, the tax consequences must be carefully considered.

As long as you live in your new recreational property at least part of the year, you may elect to claim the principal residence exemption on that property instead of your home. The key here is that you must remember that you can only claim this exemption on one property or the other and (most often) it will make sense to claim it on whichever property has appreciated the most. The onus is on you to make this election properly and this is where many people get caught up. For example, if you decide to sell your home and move and have no plans to sell the cottage at this time, you still need to make a decision as to which one has appreciated the most. If you decide that the cottage has increased more in value, you must report the capital gain/loss on your house during that tax year. If you don’t, CRA will assume you are using the exemption towards this property and you won’t be able to use it for the cottage down the road.

If you don’t plan to use the principal residence exemption on this second property (or even if you’re not 100% sure), you can minimize taxes by keeping good records of the capital costs that you put into it. Upon the eventual sale or disposition of this property, capital gains taxes will be owed on the difference between the sale proceeds and the adjusted cost base (ACB). The ACB is calculated as the purchase/transfer cost plus any capital costs. A capital cost is defined as any expense that provides a lasting improvement to the property. For example, if you buy a cottage with a worn our roof and you replace it, this would be an acceptable capital cost. However, if you replace the roof after 15 years after buying the cottage, it would not qualify. By keeping careful track of all capital cost improvements that you put in, you can reduce the capital gains taxes owing and help to ensure you make the right choice of which property to claim for the exemption.

For those in a position to help their children financially with their post-secondary expenses and decide to purchase a residence for them to live while they attend school, make sure that you don’t put this child on the title. Unless the house is gifted to the child, they won’t be able to claim the capital gains exemption. If the parents have contributed money to buy the property and also plan to receive all of the sale proceeds, only they will be able to claim the principal residence exemption if this property ends up having the largest appreciation. Adding the child on the title may also expose the property to potential creditors and create a host of other legal issues best discussed in full with a lawyer.

While the struggling housing market south of the border may seem very attractive, the tax situation there for foreign ownership is rapidly changing and far more complex than buying here at home. If you’re considering purchasing a second property in the US, make sure you consult with a US tax specialist before you make any move.

Purchasing a secondary or recreation property can provide incredible financial and memorable rewards. Before you take this big plunge however, make sure you fully understand the tax implications and set yourself up to reap the maximum possible benefits.

People buy a second property for many reasons. Some dream of getting away on the weekends and sitting on the dock over the lake. Others might decide that instead of paying our rent for their child’s accommodations while in university, they prefer to purchase an apartment or condo and hope to see a return on this investment. Regardless of the reason for purchasing this property, the tax consequences must be carefully considered.

As long as you live in your new recreational property at least part of the year, you may elect to claim the principal residence exemption on that property instead of your home. The key here is that you must remember that you can only claim this exemption on one property or the other and (most often) it will make sense to claim it on whichever property has appreciated the most. The onus is on you to make this election properly and this is where many people get caught up. For example, if you decide to sell your home and move and have no plans to sell the cottage at this time, you still need to make a decision as to which one has appreciated the most. If you decide that the cottage has increased more in value, you must report the capital gain/loss on your house during that tax year. If you don’t, CRA will assume you are using the exemption towards this property and you won’t be able to use it for the cottage down the road.

If you don’t plan to use the principal residence exemption on this second property (or even if you’re not 100% sure), you can minimize taxes by keeping good records of the capital costs that you put into it. Upon the eventual sale or disposition of this property, capital gains taxes will be owed on the difference between the sale proceeds and the adjusted cost base (ACB). The ACB is calculated as the purchase/transfer cost plus any capital costs. A capital cost is defined as any expense that provides a lasting improvement to the property. For example, if you buy a cottage with a worn our roof and you replace it, this would be an acceptable capital cost. However, if you replace the roof after 15 years after buying the cottage, it would not qualify. By keeping careful track of all capital cost improvements that you put in, you can reduce the capital gains taxes owing and help to ensure you make the right choice of which property to claim for the exemption.

For those in a position to help their children financially with their post-secondary expenses and decide to purchase a residence for them to live while they attend school, make sure that you don’t put this child on the title. Unless the house is gifted to the child, they won’t be able to claim the capital gains exemption. If the parents have contributed money to buy the property and also plan to receive all of the sale proceeds, only they will be able to claim the principal residence exemption if this property ends up having the largest appreciation. Adding the child on the title may also expose the property to potential creditors and create a host of other legal issues best discussed in full with a lawyer.

While the struggling housing market south of the border may seem very attractive, the tax situation there for foreign ownership is rapidly changing and far more complex than buying here at home. If you’re considering purchasing a second property in the US, make sure you consult with a US tax specialist before you make any move.

Purchasing a secondary or recreation property can provide incredible financial and memorable rewards. Before you take this big plunge however, make sure you fully understand the tax implications and set yourself up to reap the maximum possible benefits.

Insurance products provided through multiple insurance carriers.
Mutual funds products are offered through Investia Financial Services Inc.