A shared vacation home is cherished and typically stays within the family from generation to generation. Caring for its preservation is a heartfelt matter for both parents and children. Through proactive ownership arrangements, it is possible to ensure that the summer cottage ultimately passes entirely to those who truly want it. Additionally, properly planned transfers offer a tax incentive: by transferring the property during the owner’s lifetime, the overall tax burden can be lower than if the property is inherited later.
During the owner’s lifetime, property can be transferred forward through sale, gift, or a combination of the two known as a gift-like sale. The means of acquisition upon death are inheritance and a will. When property is transferred entirely as an inheritance, there are no longer any tax planning opportunities available: inheritance tax is assessed based on the fair market value of the asset to the recipient. However, if the deceased has made a will, some planning possibilities exist. By including usufruct provisions and dividing the property among multiple beneficiaries, taxes can be reduced. Furthermore, a will can ensure that the summer cottage passes to the intended recipient and that it can be used by those persons the testator wishes to have access to the cottage.
In most cases, it is more tax-efficient to receive an asset well in advance as a gift rather than later as an inheritance. This is due to the progressive nature of inheritance and gift taxes. If a single asset is given early as a gift, it will eventually reduce the size of the inheritance: with an entire inheritance, the tax progressions become higher than with an individual gift, so it is generally advisable to give the gift beforehand to reduce the taxable estate.
A gift ensures that the asset truly transfers to the person intended to receive it. If the donor retains a right of usufruct (right of use and control) over the gift for themselves or another person, it ensures that the person receiving ownership cannot dispose of the asset against the wishes of the usufructuary, and that the usufructuary has the right to use the asset. The retained usufruct is assigned a capitalized value for gift tax purposes, which reduces the gift tax payable by the person receiving ownership. The usufructuary does not pay any tax on the right they receive.
Additionally, a condition can be attached to the gift that the spouses of the donees have no marital property rights to the gifted asset. When the asset is transferred as an inheritance, it becomes property subject to marital rights for the heir.
Additionally, the summer cottage can be transferred through a sale or a sale with a gift-like nature. If the sale is conducted in a gift-like manner, meaning at a significantly reduced price, it results in a taxable gift. The threshold for this gift-like price is set at 75% of the asset's market value. If the sale price exceeds this threshold, no taxable gift is formed, and it is considered a regular sale. However, when it comes to both sales and gift-like sales, one should not focus solely on gift taxes: both transfer methods trigger capital gains tax and transfer tax. For this reason, these transfer methods are rarely attractive for intra-family arrangements.
With a well-planned transfer procedure, the fate of a family’s cherished vacation property can be secured in a controlled and tax-efficient manner. Be sure to take action in time.
