In my last blog, I looked at some of the pros and cons of gifting the family cottage to your children. Another option is to sell the cottage to one or more of your children at its fair market value or some other agreed-upon price. This may be a good option if some or all of the following apply:
• you no longer use the cottage;
• you need the money, and
• one or more of your children can afford to purchase it.
Regardless of how much your child pays you for the cottage, you must report any capital gain and pay the appropriate tax as if you had sold it at its fair market value (FMV). It is important to note that if you sell the cottage to your child at less than FMV, there is a potential for double tax.
By double tax here is what we mean. If the child pays you less than FMV for the cottage, you pay capital gains tax based on your gain (the difference between what you paid for the cottage and the FMV at the time you sell it). When your child sells the cottage or dies, your child will pay capital gains tax on his or her gain including a portion of gain on which you have already paid capital gains tax. The child’s purchase price is the starting point not the FMV at the time when they bought the cottage from you.
The good news is that since you no longer own the cottage, when you die it is not part of your estate and there are no probate fees on the value of the cottage.
Reproduction of this blog is permitted if the author is credited. If you have questions or if you would like more information, please call us at 613 836-9915. This blog is not intended to be legal advice but contains general information. Please consult a lawyer or other professional to determine how the information in this blog might apply to you.
Blog posts pre-dated December 1, 2015 were originally published under Neff Law Office Professional Corporation.
