Inheriting the Family Cottage? Think Carefully About the Costs

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Inheriting the Family Cottage? Think Carefully About the Costs Posted: 29 Aug 2011 04:00 AM PDT With September around the corner, many Canadians are preparing to close up the family cottage. And some are facing the reality that they'll be inheriting the family cottage sooner rather than later. If you find yourself in this position, keep in mind that inheriting a property isn't as simple as some of us think. "The family cottage, with its memories, sentiment and history, is also a financial commodity, especially considering the escalating value of recreational properties," says Christine van Cauwenberghe, Director of Tax and Estate Planning for Investors Group. "Handing over the keys involves sound financial planning and communication with the entire family." Here are four things to consider. photo credit: Numinosity (by Gary J Wood) Taxes and other costs Many people who get the family cottage in a parent's will think of it as a free gift. It's not. It's subject to a substantial capital gains tax. Here's how it works: The Canada Revenue Agency (CRA) figures out the fair market value of the cottage. They also determine the property's adjusted cost base, which is the amount your parents paid for it plus the cost of any improvements they've made over the years. The fair market value minus the adjusted cost base is your capital gain. You'll be taxed on 50% of this capital gain at a marginal tax rate of 40%. So, if your parents purchased your family cottage in the 1970s for $50,000, and its fair market value the day you inherit it is $350,000 (and they've made no improvements), you could face a tax bill of $60,000 or more. Some parents mistakenly think they'll be better off giving their child the cottage as a gift while they're still alive. But the capital gain tax still applies. It simply shifts from the child to the parent. Another mistake parents make is selling the cottage to one of their children for a nominal amount, say $1. Van Cauwenberghe says this is the worst option of all. Remember that the CRA uses fair market value to calculate capital gains, not sale price. Using the example above, the parents who sell the cottage will still be on the hook for capital gains taxes of $60,000. Even worse, the child who bought the property will face a huge tax bill when they eventually sell, because the CRA will use the $1 purchase price to calculate the property's adjusted cost base. Think about it: If the child eventually sells the property for $600,000, they could pay taxes on a capital gain of $599,999. Besides taxes, there are other costs to consider. Has the cottage been paid off? If not, you'll be paying the outstanding mortgage. Does the cottage need renovations? How much are property taxes? If you don't want any surprises, talk to your parents about all of the costs you'll have to take on. Minimizing the tax bill While gifting the property or selling it for a nominal amount won't work, there things you can do to minimize the tax bill. Remember that the property's adjusted cost base is the amount your parents paid for it plus the cost of any improvements they've made on the property. And the higher your adjusted cost base, the lower your capital gains tax. So make sure your parents save all receipts for work they've put into the property. Another idea is to have the cottage designated as your parents' principal residence, because the CRA allows everyone to have one principal residence that's exempt from capital gains tax. If the family cottage has gone up in value more than another home your parents own, this option could work. How you'll pay the bill Van Cauwenberghe advises looking into alternatives, such as: • Taking out a second mortgage on your own home • Borrowing against a line of credit • Selling your parents' other properties or investments However, says van Cauwenberghe, your parents may not have much to sell. And you may not want to go into debt to inherit the family cottage. If that's the case, you'll want to make sure your parents have adequate life insurance to help offset your costs. If your parents can't afford life insurance, think about paying their premiums for them. Getting sound advice There are other ways to minimize your capital gains tax. And there are likely many costs associated with inheriting the family cottage that you've never thought of. Before you take over the keys, talk to a trusted financial advisor, accountant, or tax or estate lawyer.

Cheap Souvenir Ideas for the Whole Family Posted: 29 Aug 2011 04:00 AM PDT We all like to have things we can look at to remember our travels. The problem is, how do we find the room for our souvenirs in both our budgets and backpacks? Here are four simple and cheap souvenir ideas for the entire family to enjoy. They are all affordable, and allow you to continue traveling light for budget purposes. photo credit: helga tawil souri Textiles Weavings and other fabric goods are available in stores and market stalls throughout the world. Not only do they pack easily into your luggage, they are an affordable way to commemorate your travels without making your home look kitschy. Some examples of textile souvenirs I've personally used in home include camel hair and ikat pillow covers from Egypt and Indonesia, colorful alpaca wool table runners from the mountains of Peru, and a llama wool blanket from Ecuador. Dressy head scarves purchased in a larger size can be used as beautiful piano scarves and window toppers. Another simple textile souvenir idea is to purchase sarongs from various places around the world. They can be used for a number of things, including a beach cover, shower curtain, table cloth and backpacker's picnic blanket. Photos With a high-quality digital camera, your travel pictures can be featured more prominently than the traditional family photo album. Architectural shots from Angkor Wat or Petra can be matted and framed for elegant entryway decorations. If the natural light isn't cooperating during your trip, switch your digital image from color to black and white or sepia. You'll still have a look that's classic, but the color contrast will no longer be an issue. Tribal photographs, wildlife close-ups, iconic urban images and nature photography can all be used successfully in your home décor. Beads If you're looking for a souvenir that's affordable, easily packed and can be used to create a number of different gifts and souvenirs, then you'll want to give beads the proper air time. You can make many  different souvenirs from beads, and they are available by the strand for a song in tourist markets from Southeast Asia to the Middle East and South America. Necklaces, napkin rings and worry beads are all gifts that grownups can enjoy making for themselves and others after a trip. Beads are also a great thing to have on hand in case you have a few rainy days on the family camping trip this summer. Children can make beaded friendship rings, zipper pulls and key chains from the comfort of the tent or campground lodge. Rubbings Rubbings can range from professional art pieces created from temple carvings to fun crafts for the children to create and use to decorate their rooms back home. Obviously, you'll want to be considerate of any cultural parameters in the place you'll be visiting, and certain locations can stand up to rubbings while others might be too delicate. That being said, I've seen some amazing artwork created from simple paper and a rubbing utensil secured over floor art in old churches, on the sides of jungle temples in Cambodia and from old ruins in Guatemala. So you certainly shouldn't be afraid to dream big. Children might get a kick out of creating Halloween rubbings from some of the old epitaphs in historic graveyards throughout the American West, or using leaves as a vacation nature craft activity. Cheap souvenirs don't have to look tacky. There are plenty of inexpensive and fun travel souvenirs for children and grownups alike to enjoy. So get out your camera, design some jewelry or take a weaving class on your next international getaway. You'll have some stylish souvenirs to remember your journey and still be able to stash some cash away for your next adventure.

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