Cottages
Topics
Leaving a
cottage to your children
The wish of most cottagers is to
pass on their cottage to the next generation. Most are keenly aware of
how special and valuable the cottage experience is, and of how difficult
it will be for their children to be able to find and afford a cottage of
their own. However, most are not aware of how many obstacles must be
overcome to ensure a realistic chance of keeping the cottage in the
family.
Some of these obstacles include:
- Because of changes to the Income Tax Act, many
cottages will have to be sold by executors upon the death of the
parents simply to pay decades of accumulated capital gains tax liability
.
- A
child's separation or
divorce may result in the cottage
being sold to satisfy the financial demands of the divorcing in-law.
- A health crisis such as a
stroke or Alzheimer's Disease causing
mental incapacity may result in the government forcing a sale of the cottage.
- Differences between the
children's incomes and expectations may cause such family friction
that the cottage is sold by the children themselves within a few years
of inheriting.
In order for these and other
obstacles to be avoided, careful attention must be paid to the
provisions in your Will for how and where your assets will be bestowed.
If you have not already done so, please read the information on
Wills to find out how to
protect your heir's interests.
Testamentary
trusts If you are successful in passing
on your cottage to the next generation, avoiding the many difficulties
and pitfalls, congratulations!
However, there are still serious
risks to be overcome to ensure that the cottage stays with your
children, and is not soon sold because of internal fractions that will
inevitably arise. The really is that in most families, there will be a
difference in the children's incomes and financial resources. This must
be addressed before it becomes a crisis.
For example, if the cottage is
left to your son and daughter jointly, it may be that your daughter can
easily afford to carry her share of the cottage expenses of heat,
electricity, taxes, insurance and maintenance. Your son may be handling
all he can by simply keeping up his own home, with little or nothing
left over to pay his share of cottage expenses.
This situation inevitably leads
to stress, with the daughter exasperated that she is always having to
chase her brother for his financial contributions, and the son resentful
of the ongoing financial pressure.
This ongoing irritation can
become a crisis when a major expenditure is required, such as for a
septic system replacement, a new roof or structural repairs. The result
is that the cottage can quickly become a source of contention rather
than family fun. All too often, this leads to family strife and a sale
of the cottage to remove the root of the problem.
A solution with considerable
merit is for the parents to leave a certain sum of capital in trust by
their Wills, to be used exclusively for cottage purposes.
This is referred to as a
testamentary trust. It enables all or a significant portion of the
operating costs to be paid from the trust, rather than from the
childrens' own pockets. Furthermore, if there is a need for a
substantial expenditure, then the trust capital can be encroached upon
for that purpose, avoiding a financial emergency.
The use of a testamentary trust
compensates for the differences in economic positions between the
children, to the benefit of all.
When parents are alive and
active, it is relatively easy to apportion the many cottage
responsibilities among the children. However, when the parents are no
longer available to act as mediators and facilitators, far too sibling
strife breaks out. Just a few of the disputes that may arise include
questions such as:
- Who is to open and close the
cottage?
- Who is responsible for
organizing the payment of bills?
- Should the cottage operating
and capital costs be shared equally, or in proportion to income, or in
relation to use?
- Is the cottage equally
available at all time for all siblings, or are they to take turns
having exclusive use?
- How are the turns to be
allocated, and who gets the long weekends? Is use restricted to family
only, or can anyone bring along a gang of friends?
- If one of the children has a
financial crisis, brought on by loss of a job, or a marital breakdown,
or simply too much debt, can that child force the sale of the cottage
and a division of the net proceeds?
Some of these issues may sound
trivial, and some second generation families do successfully navigate
them by the seat of their pants.
Unfortunately, many other
families hit deadheads. The result can be that the cottage and its use
becomes a bone of contention rather than a focus of family fun. Sadly,
it is not uncommon for the cottage to be sold in these circumstances. A
joint ownership agreement, negotiated while the parents are alive and
able to assist, can be invaluable in retaining family harmony and
enabling successful second- and third-generation cottaging.
Parents with more than one child
may often face a dilemma when they are planning to pass the cottage on
to the next generation. Should the cottage be left to all, or to some,
or just to one?
This question is very complex
from the family point of view, with delicate issues of harmony,
proximity and personalities all factoring in.
Nevertheless, a decision must be
made and settled in the parents' Wills, or the whole matter becomes a
ticking time-bomb for the children. In addition to these family
concerns, there are different tax and financial consequences arising
from the choice ultimately made by the parents. In some cases, the best
decision is to leave the cottage to only one of the children. Perhaps
only one child is interested in the cottage, or others have recreational
properties of their own, or others are too geographically distant for
cottage ownership to be practical.
If that decision is made, for
whatever reason, there are still important considerations for the
parents to ensure that the time bomb does not explode after their
passing. The first is the tax consequences.
Perhaps the cottage is left to
the son, and the remainder of the estate to the daughter. If so, then
after the parents die, then the son will receive his cottage free and
clear, while all of the Capital Gains Tax liability built up on the
cottage will be paid from the daughter's share! To avoid this unfair and
unintended result, special planning is required with specific wording
included in the Wills.
Another planning problem arises
from the wish of the parents to be fair to all children. Most want to
ensure that each child receives a roughly equal portion of the estate.
Accordingly, if one child is to receive a valuable cottage, then this
inheritance should be balanced in the Wills for the other children.
This balancing or adjusting
mechanism can be one of several approaches. For example, it could be an
arbitrary figure chosen by the parents and incorporated into the Wills.
Alternatively, it could be at a fixed amount determined by a present
value appraisal, which is specified in the Wills.
Another approach could be to set
out an adjusting formula in the Wills, using an appraisal figure to be
obtained as of the date of death of the parents. Each has its advantages
and disadvantages, but don't forget to provide in your planning for the
possibility that your non-cottage assets may be substantially reduced
from their present value by the time of your passing.
The dilemma of leaving the
cottage to all, some, or one of the children is very complicated. It is
vitally important to family harmony and to the successful transition of
the cottage to the next generation to sort out the best balance of
practicality and fairness.
A lawyer experienced in estate
planning can be of great assistance
in analyzing and advising as to the best method for your family.
One of the unfortunate realities
of our modern society is the increase in marital breakdowns. In 1990
Statistics Canada reports that for every 100 marriages in Canada, there
were 38 separations or divorces. We all hope that our own children will
avoid this, but we cannot base our planning on hope.
Marriage breakdowns not only
produce tremendous emotional stress, but also create tremendous
financial pressures as demands are made for division of assets and
payments of support. If a child is the owner or part owner of a cottage,
it is often reluctantly viewed as a solution to the financial pressures.
The sale of the cottage, or requests to be bought out by other siblings
may result.
It is critically important when
passing on the cottage to children to provide protection against the
possibility of marital breakdowns. Whether the cottage passes as a gift
during the lifetime of the parents, or through the Wills following the
death of the parents, protection can be built in to exempt the value of
the cottage itself, and any increases in its value during the marriage,
from any claims by a divorcing inlaw under the Family Law Act.
We all hope that such protection will
never be needed, but it cannot possibly hurt to include
the protection in your planning process, and for many children such protection
may well prove to be an economic life saver.
Prior to 1992, every individual
could take advantage of a Capital Gains Tax exemption of $100,000. This
meant that if a husband and wife bought a cottage for $50,000 it could
pass upon their death to their children without being taxed even if it
had increased in value to $250,000.
After changes to the Income Tax
Act in 1992 and 1995, the Capital Gains Tax exemptions were first cut
back and then terminated. Now that same cottage passing to children
could trigger over $75,000 in Capital Gains Taxes to be paid by the
estate. In many cases, this huge cost may leave the children little
choice but to sell the cottage to raise the cash necessary to pay the
tax.
Many people elected to use
special provisions of the 1995 budget to minimize this potential
problem. If you were one of these fortunate and farsighted people, then
you should seriously consider transferring the cottage to the children
now. This will permit the cottage to reach the next generation
with the least Capital Gains Tax consequences. It also means that
payment of future Capital Gains Tax liability can be deferred for a
generation (for the lifetime of your children).
If you do not wish to transfer
the cottage to the children now, then you must give serious
consideration to funding the Capital Gains Tax liability, through other
assets or perhaps insurance.
What is certain is that Capital
Gains Tax liability is one of the most serious obstacles to passing the
cottage on to your children. The financial problem will only get worse
as time goes by. One of the first steps parents should take in planning
family cottage continuity is to obtain advice and make decisions to deal
with this potentially disastrous problem.
Dick Harrison's fondest childhood
memories centre on the family cottage. His dad taught him to canoe and
fish. His mom watched him swim and played cards with him on rainy days.
He was lulled to sleep by the call of the loon and the lap of the waves.
His first romance was with a girl down the lake. He loves the cottage
and the special summers there.
Harrison inherited the cottage
when his parents died. He hoped his three children would also enjoy the
benefits of cottage life and to his delight, they took to it like ducks
to water.
Now a grandfather, Harrison is determined to keep
the cottage in the family for the next generation. But he fears this may
leave his children and grandchildren a legacy of problems. Aware of
succession problems (see the May, 2000, issue of Good Times
magazine) including tax costs on death, children squabbling over operating
costs, disputes over use and the threat of forced sale, he asked me for
advice.
I gave Harrison the good news:
selling is the last alternative, not the only one. I discussed with him
the three principal challenges in planning for family cottage
succession, then outlined a six-step plan to help it happen
successfully.
The Three Challenges
Paying the Capital Gains
Tax
The first
challenge in changing the ownership of a cottage is the capital gains
tax. This must be paid when the cottage is sold or transferred, during
the parents' lifetime or after their death. Although the federal
government recently reduced the impact of this tax, it can still cost
tens of thousands of dollars, and many families are forced to sell the
cottage as a rest.
Keeping the cottage going
The second challenge is working out how the
children will agree to use and operate the cottage. Among the questions
to be answered are: Can any child use the cottage any time, or will
there be periods of exclusive use? Who will open and close the cottage?
Who makes sure the bills are paid? Who decides if improvements or
additions are to be made? When a son dies, does his share of the cottage
pass to his wife or his children, or does ownership continue with the
surviving siblings only. Without good answers to these questions, many
cottages become a source of family strife, not pleasure.
Managing expenses
The third challenge involves the
children's financial status. Usually siblings have different financial
resources and abilities. Expenses are inevitable, whether it's replacing
the septic system, paying the municipal taxes or repairing the roof. If
some of the kids can't afford to contribute their fair share, then
friction and stress are also inevitable.
The six planning
steps
The advice that follows gives you
ideas on how each of these challenges can be dealt with. This
information will help you make informed decisions, but once you've got a
plan, it's best to have it checked out by a professional who can make
sure you haven't overlooked any important considerations, financial and
otherwise.
1)
Estimate the Capital Gains Tax
Before alternatives can be
considered, the capital gains tax issue must be addressed, whether the
cottage is gifted to the kids or sold to others at fair market value,
either while the parents are alive or after their deaths. An
accountant can do this for you, but you can also do it yourself. The
worksheet that follows tells you how.
2)
Reduce the tax bite
Your goal is to pass the
cottage over to the children without bankrupting yourself or your
estate. There are legitimate ways to reduce the tax bite.
Should you wish to transfer the
cottage while you are alive, one valuable technique is to transfer it
in stages, rather than all at once. If you transfer 20 per cent each
year for five years, the capital gains taxes in each year will be much
less.
If you're considering a
transfer during your lifetime, check the effect on your Old Age
Security. The transfer of a cottage, even as a gift, results in your
income tax return showing half the capital gains tax portion as
income. If your income exceeds $52,800 (the amount for the 2000 tax
year), the government starts clawing back the OAS. If your real income
is $40,000 and you add $20,000 worth of capital gains income from the
cottage transfer, the OAS clawback will be triggered.
This clawback of your monthly
OAS can be avoided or minimized. Using the same example of real income
and deemed income from the cottage transfer, if you transferred half
the cottage this year and the other half in January of next year, the
total income level would be below the threshold that triggers the
clawback. Without careful planning, you may lose as much in OAS
clawback as you pay in capital gains tax.
If you leave the cottage in
your will, then the capital gains tax is deferred until you die. The
actual amount paid may be greater, because the cottage fair market
value may have increased, but the tax can be paid from a variety of
sources, not from your present assets.
Whether you transfer the
property during your lifetime or in your will, an excellent technique
to reduce the capital gains tax is to use the principal residence
exemption. Increases in value on a principal residence are exempt from
capital gains.
Usually we think of our house
as our principal residence, not the cottage. Legally, however, you can
designate either for the purposes of the exemption. For example, if
over the last 10 years, your cottage has increased in value more than
your house, you can choose to designate the cottage as your principal
residence for that period. You can only designate one property as a
principal residence for each specified period, See the sidebar for
clever techniques using this exemption to minimize the tax hit.
3)
Fund the Capital Gains Tax Liability
If you decide not to pass the
cottage on to the kids during your lifetime, then it is important to
identify funds to pay the tax so the cottage won't have to be sold. An
obvious source is the sale of your home. As a principal residence
(unless you have designated the cottage as such), it is exempt from
capital gains tax. Therefore all of the net proceeds from the sale of
the house are available to pay the tax on the cottage.
Other sources of funds include
savings and investments. If these are not sufficient, then get
creative. Even elderly parents in reasonable health can qualify for
more life insurance coverage. If the premiums are too high for the
parents to comfortably manage, then consider asking the children to
share the cost. Splitting the premium among several people may make
this an affordable alternative.
Perhaps you'd like to pass the
cottage to your children during your lifetime but can't afford the
tax, even if the transfer is spread over five years to minimize the
annual impact. Consider asking the kids to share the annual tax
consequences. If, each year, the parents transfer 20 per cent of the
cottage to their four children, and each transfer triggers $20,000 of
gain, then each child would have to pay no more than $1,200 annually.
This may be a small price to pay to know that they will eventually
acquire the cottage and not have to deal with a much larger tax amount
in a single year.
Another possibility, although
not always practical or desirable, is to use the cottage value itself
to fund the tax cost. If you have a large parcel of land, you may be
able to sever a lot and sell it. And if there isn't enough cash after
the death of the parents, the kids could put a mortgage on the cottage
and pay that off over 5 or 10 years.
4)
Select your preferred plan
Now that you know what the
capital gains implications are and have some ideas on how this can be
funded, you're reading to formulate a plan to transfer ownership of
the cottage. There are a variety of options, including:
-
Gifting
the cottage to the children now. Gifting is simply transferring an
interest in the cottage without requiring payment. It uses the same
deed form, but no value of consideration is specified because no money
is involved. You cannot save on taxes by gifting. For tax purposes,
the property is deemed to pass at fair market value. You must report
the gift transfer on your next income tax return as a taxable
disposition using the fair market value (FMV), even though you
actually received no money. This is one of the impediments to cottage
succession - even though the parent may choose to give the cottage
away, the tax costs are the same as a real sale, and the parent does
not have sale proceeds to pay the tax.
- Selling the cottage to the
children at market value or less now. Even if you sell the cottage
to your children for less than market value, you still must report
the sale at FMV for tax purposes.
-
Transferring to the
children a percentage of the cottage in stages over several years,
whether by gifting or selling. Regardless, that portion will still
trigger capital gains tax if there was a gain. If the total capital
gain on a cottage is $50,000 and you gift 10% to a child one year,
then you have triggered 10% of the total capital gain in that year
and must report $5,000 on your tax return.
-
Retaining a life interest
for parents, whether gifted or sold. If a parent gifts the property,
he or she just retains the life interest by saying so on the deed of
transfer. If the children are buying the cottage, then they must
either agree to the life interest or the sale will not take place.
The life interest provides several advantages to the parents. One is
that it entitles them to use the cottage for their lifetime as of
right, not rely upon the continued goodwill of the child who now
owns the cottage. Another is for the parents to retain a measure of
control. With a life interest, the child cannot "cash in" on the
cottage by selling it or mortgaging it, without the involvement and
consent of the parents. This would defeat the intention of keeping
the cottage for family purposes. If and when the parents are no
longer interested in using the cottage, or are no longer concerned
that a child may cash in on it, then the life interest can be
released. This is done by a simple and inexpensive registration on
the title of the cottage.
-
Leaving the cottage to the
children in your will.
Each of these options (there
are more) will have advantages and disadvantages as to amount and
timing of tax liability, loss or retention of control, exposure to
claims by divorcing in-laws and other consequences. At this stage, it
is almost certainly best to involve professional advisers such as a
lawyer and/or accountant to properly weigh the benefits, accurately
predict the costs, and avoid unpleasant surprises.
5)
Agreements avoid adversity
Once you have decided on a
plan, your task is not over. Cottages that survive the shoals of
succession to safely reach the next generation now must run the
dangerous rapids of family dynamics. These can be even more
complicated and less predictable than tax rules.
While parents are alive, they
may make most of the cottage decisions. From habit and respect,
children generally follow their parents' lead. What happens after the
parents are no longer involved?
Maybe your children always
agree, but most families will run into serious difficulties among
themselves sooner or later. Some of the issues will be mundane, others
will be major. All these considerations have the potential to create
friction:
-
Who will open and close the
cottage?
-
Should the ongoing costs of
the cottage be shared in proportion to usage by kids, or split
evenly?
-
Who decides if improvements
or additions will proceed?
-
Who is responsible for
making sure the utility bills, municipal taxes and insurance
premiums are paid on time?
-
Can all children use the
cottage all the time, or will there be periods of exclusive usage
for each child? Who decides those periods?
-
Can children bring friends
as guests, or will it be family members only?
-
Can a child rent the
cottage during his or her turn, if he or she cannot use the cottage
personally?
-
Can a child in need of
money force the others to buy his or her share? Can a child sell the
share to a third party without the consent of the other siblings?
-
What happens if a
child/owner dies? Does the share go to the surviving spouse, who may
later remarry?
These are serious issues, and
many family cottages only survive a few years before the accumulated
stress turns the cottage into such a bone of contention that it is
listed for sale.
The solution is a written
Cottage Co-Ownership Agreement. You can create this as a family, or
prepare one with a lawyer. As a written contract, the agreement should
be legally enforceable. The details should be worked out before the
children take over. The parents can serve a leading role in
encouraging the creation of this cottage saving device, and in
facilitating compromises. Some matters may be dealt with by a simple
majority. This would work well for decisions such as redecoration or
usage. Others may require unanimous approval, such as additions to the
cottage or a sale to non-family members.
With an agreement, most issues
can be resolved before they become problems. Although every child may
not be happy with the outcome, he or she should accept the result
because all agreed beforehand on the method of resolution.
A Co-Ownership Agreement is
essentially a business partnership agreement. Some issues addressed
are identical, like decision-making procedures and disposition of
interests by the partners. Other matters are unique to cottages and
your own family's needs and desires. You can try to work it out
yourselves, or you may decide that involving a lawyer will increase
the chances of a thoroughly protective document.
One way or the other, a
Co-Ownership Agreement is the best insurance policy against loss of
family harmony and the cottage itself. If it's left for the kids to
work out after the parents have died, it may never be accomplished.
6) Level the financial playing field
In every family, there will be
differences in incomes and wealth among the children. Some kids will
be struggling with mortgages and grandchildren's educational costs,
some will have a nice nest egg already set aside.
What happens if one of the
cottage co-owners cannot come up with his or her share of the taxes,
the insurance, or the cost of replacing the septic system? Do the
septic repairs wait a few months or years until all can contribute
equally? Do the more affluent carry the burden for the less fortunate?
There is an excellent solution.
Parents can set money aside in their wills for a Cottage Trust. This
money is invested and administered by the executor child or children,
and is reserved for cottage uses only. The investment income can be
used to contribute towards the annual carrying costs of taxes,
insurance and electricity. This contribution reduces the amount that
each child has to dig out of his or her pocket each year.
When a major problem arises,
like replacing that pesky septic system, the Cottage Trust again comes
to the rescue. If one or more of the children cannot come up with an
equal share of the cost, then the repair is paid out of the capital of
the trust. True, this leaves less money next year to produce income,
so each kid will have to dig a little deeper to come up with the
portion of the carrying costs. However, conjuring the thousands of
dollars required for the septic system may be impossible, while
finding a few hundred for annual costs may be merely inconvenient.
Safe and sound You can choose the succession
plan that best suits your family situation, work with your children on a
Co-Ownership Agreement that anticipates, avoids or resolves inevitable
issues. Then you can sit back, like Dick Harrison on his deck chair, and
admire the splendid scenery, secure in the knowledge your family will
enjoy the same lovely view for generations to come.
This article will help you plan
for family cottage succession. It is not a substitute for professional
advice.
How to estimate cottage capital
gains:
- What is the fair market value
today?
Start by figuring out the
present fair market value (FMV) of the cottage. Check recent sales in
the area, ask a realtor for an opinion of value, or pay for an
appraisal.
- What is the cost base?
Find the cost base of the
cottage. If you acquired the cottage after 1971, the value as of the
date of acquisition is the cost base. If you acquired it before 1971,
then the value as of December 31, 1971, is the relevant amount. If you
cannot get this value by yourself, appraisers can research comparable
sales.
- How many capital
improvements?
Next, add up the capital
improvements made to the cottage or the property since you acquired
it. This would include new docks or additions, replacing the roof or
windows, installing a new well or pump. You can't include simple
repairs, maintenance or the value of your own hard work in improving
the cottage, only the amount actually paid to others. Can't find the
invoices and receipts? At this stage, just write down as accurate and
complete a list of improvements and costs as possible.
- What is the adjusted cost
base?
Now add the cost base and the
capital improvements. This will produce the adjusted cost base (ACB).
(If you were clever enough to make use of the capital gains tax
exemption before it was taken away in 1994, then you can get the ACB
from the tax return in 1994. The process above still applies, but from
1994 instead of from the date of acquisition.)
- What is the total capital
gain?
Subtract the Adjusted Cost Base
from the Fair Market Value. This gives you the total capital gain.
- What is the tax payable?
Divide the capital gain figure
by half to get the taxable capital gain, then again by half to
approximate the tax actually payable.
Sound complicated? Here's an
example:
- The realtor estimates the
fair market value today to be $150,000.
- You bought it in 1979 for
$30,000, the cost base.
- You have spent $20,000 over
the last 20 years on capital improvements.
- The Adjusted Cost Base then
is $50,000 (cost base of $30,000 plus improvements of $20,000).
- The total capital gain is
$100,000 (FMV of $150,000 less ACB of $50,000).
- The approximate tax payable
if the cottage is transferred will be $25,000 (half the capital gain,
then halved again to represent your marginal tax rate).
Once upon a time, there was no
Capital Gains Tax in Canada. The federal government imposed it on an
objecting populace as of January 1, 1972. Since then, the general trend
has been from bad to worse as tax inclusion rates were increased,
fairness was diminished and exemptions taken away. Recently we have seen
a glimmer of light in the reduction of the inclusion rate to 50%, but
this break could be reversed overnight.
One of the most valuable tax
tools left to us when planning to keep the cottage in the family is the
principal residence exemption. It is also one of the least understood.
All Canadian residents qualify for this exemption. Basically, it says
that our principal residence is not subject to capital gains tax no
matter how much it increases in value. There are several techniques to
use this to reduce the capital gains tax impact on a cottage. With
knowledge about the principal residence exemption, you can stack the
deck to deal yourself a winning hand. Here are three of the best
techniques to beat the government at its own game.
- Double or Nothing:
In previous years, a husband
and wife were each allowed to designate a residential property as a
principal residence. This meant that the husband could exempt the
house from capital gains tax, while the wife could use her exemption
for the cottage.
Unfortunately this advantage
was taken away effective December 31, 1981. Since then, an individual
or a married couple is limited to only one principal residence at a
time. However, the benefit of the double exemption continues. If you
and your spouse were clever enough to own the house and the cottage in
separate names prior to 1982, you can take advantage of a double
exemption for the period the properties were owned prior to that year.
As much as a whole decade of capital gains exposure can be made to
disappear with a wave of the pen. Not sure how title to the house and
cottage were held during that period? A few dollars spent on a lawyer
to subsearch your property records will let you know whether you can
get a double exemption.
- Nothing Up My Sleeve:
The fact that since December
31, 1981, only one principal residence exemption is available does not
mean that cottage owners should ignore the advantages of this
technique. You can designate the cottage as your principal residence
rather than the house, if that works to your advantage. You do not
need to pretend that your head hits the pillow more nights at the lake
than in town. It's your right to choose which of your residences you
want to exempt.
When would this work for you?
Maybe you inherited the cottage in 1985 at a value of $50,000 and
bought a house the same year for $100,000. Now, 15 years later, both
properties are worth $200,000. The capital gain on the cottage is
$150,000, while on the house it's only $100,000. All other factors
being equal, you would save as much as $11,750 in tax by designating
the cottage as your principal residence.
- Suffling the Deck:
Another good trick to know is
that you can switch the designation of principal residence to best
suit your tax reduction goals. It's not uncommon for there to be
periods when waterfront properties are skyrocketing while ordinary
house prices are relatively stable, and then periods when the reverse
is true. You can take advantage of this to save tax dollars.
Let's use an illustration.
Bob's city house doubled in value from 1980 to 1990. Both cottage and
house prices were stagnant from 1990 to 1995. Then his cottage went up
in value greatly from 1995 to 1998. Since then, the gain in value on
the house exceeded that on the cottage. For tax reporting purposes,
Bob should use his principal residence exemption on the cottage to
exempt the big gain of 1995 to 1998, and use it on house for the big
gains of 1980 to 1990 and 1998 to 2000.
To make effective use of this
technique will require several appraisals of both properties to
support Bob's choices. It may require research, but the technique is
lawful, makes the maximum use of the exemption, and the payoff may be
saving thousands of dollars in tax for hundreds of dollars in
appraisal expense.
