How to take care of the taxes on vacation property

Unless you're passing assets to a spouse, when you die, you're deemed to dispose of all your capital assets at fair market value. If your vacation property has appreciated in value, there could be a significant capital gains tax liability.

You may be able to claim the principal residence exemption on the property, but that exemption usually applies to only one property - and if you choose to use it on your city home, the gain on your vacation property will be subject to tax. One efficient way to cover these taxes is with permanent life insurance. The death benefit is usually tax free, and can be used to cover your estate's tax bill. Without this ready source of cash, your executor may be forced to sell estate assets, including your vacation property, to pay taxes.

Instead of leaving the property to your children through your will, you might choose to transfer some or all of it to them during your lifetime. You can do this by gifting it to them, either as an outright gift, or by making one or more of them joint owners. You can also transfer the property to a trust with your children as beneficiaries. All of these transfer options trigger an immediate capital gain, but future capital gains on the property will accrue to your children and are not payable until they sell or transfer the property

A trust also allows you to maintain control of the property, or allows an independent third party to manage the property on behalf of the beneficiaries, even after your death. This can be valuable if there might be conflicts between your children, or if some of them are too young or otherwise not ready to take on the responsibilities of ownership. Discuss all options with your financial, tax and legal advisors.
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This column, written and published by Investors Group Financial Services Inc. is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.

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