Now that it appears summer has finally arrived here in British Columbia and in keeping with this month’s housing theme, a discussion on vacation homes makes for an appropriate topic.  The benefits of owning your own vacation home, whether here in British Columbia or elsewhere, are more than just superficial.  The control, privacy, and availability of a vacation home when it is your own, as well as the possible financial benefits reaped from rents or an increase in value are but a few of the many benefits.  Despite the benefits, current or prospective owners should be aware of the true costs and expenses related to ownership.  This article will review some of the associated costs of a vacation home from purchase to disposition. 

Property Transfer Tax

What is it?
One of the first major expenses associated with the purchase of a vacation home is the property transfer tax (“PTT”).  The PTT becomes payable when a change in title is registered at the land title office.  The amount of PTT is 1% on the first $200,000 of the fair market value of the property and 2% on the remainder.  A vacation home purchased for $400,000 will incur PTT of $6,000 payable at the time your title is registered.  Given the values of properties in British Columbia, the PTT can be a very significant expense.

How Can I avoid it?
There are a number of exemptions to the PTT that may be available to a purchaser on a real property transaction.  Unfortunately, many of the exemptions will not apply to the purchase of a vacation home.   

An exemption of PTT on the purchase of a vacation home may apply when the following criteria are satisfied:

• The vacation home is a “recreational residence” as defined in s.14 of the Property Transfer Tax Act;
•  The property does not exceed five hectares in area;
• The fair market value of the property is equal to or less than $275,000;

Failure to satisfy all of the above criteria will result in the full costs of PTT becoming payable.   

Property Tax

What is it?
Depending on the location of the vacation home, yearly property taxes will be payable to the appropriate municipality or rural taxing authority.  In Victoria, current property tax is charged at a rate of $377.31 per $100,000 of assessed value.  A $400,000 vacation home would therefore incur yearly property taxes of $1509.24.  As a reoccurring expense, over a period of time the cost of property tax is a significant expense.  

How can I avoid it?
Property taxes are unavoidable.  While readers may be accustomed to receiving a home owners’ grant and additional homeowners’ grant on their principal residence (which may save a property owner up to $845 a year) the grants will not apply towards the property taxes on the vacation home. 

Income Tax

What is it?
A future sale or transfer of the vacation home will be subject to income taxes if there is an appreciation in value from the time it is purchased to the time it is sold. 

How can I avoid it?
There are several ways to avoid or mitigate against the tax on a vacation home.  While all the options and tools that may be used for tax planning are beyond this article, one popular exemption is the principle residence exemption.  The principle residence exemption may be used on the vacation home provided that:

• The vacation home can be defined as a housing unit;
• The property is owned by the taxpayer;
• The vacation home is ordinarily inhabited by the taxpayer; and
• The property is designated by the tax payer as his or her principal residence.

The principle residence exemption may only be applied to one of the taxpayer’s properties each year.  It will therefore be necessary to speak with your lawyer and accountant to determine if the exemption is best applied to your home or vacation home.  Furthermore, consultation with a professional is advised to avoid any errant action which may preclude the vacation home from being considered a principal residence.

Probate

What is it?
When an owner of a vacation home dies, the vacation home is part of the deceased’s estate, and will attract probate taxes.  Probate in British Columbia is charged at an approximate rate of 1.4%.  On a vacation home with a value of $400,000, the probate costs on the home alone would be $5,600. 

In addition, there is a deemed disposition of the vacation home at a taxpayer’s death, and the income tax consequences noted above will apply.

The costs associated with income tax and probate may cause the estate hardship in paying those costs and retaining the home for the family of the deceased.

How can I avoid it?
There are various planning tools to defer, avoid or prepare for the costs of probate.  Some of the tools include owning the vacation home in joint tenancy, holding the vacation home in a trust, or purchasing appropriate insurance to help pay the tax and probate costs on the death of the home owner.  Each of these options has advantages and disadvantages which should be reviewed with one’s estate planner before purchasing the vacation home.

Summary
There are many reasons and benefits in purchasing a vacation home.  Ownership of a vacation home, however, does not come without costs of which a prospective purchaser may be unaware.  The cumulative costs of PTT, property tax, income tax, and probate tax, should be considered before moving forward.  Once a decision is made to find a vacation home, the purchaser should consult with his or her legal and accounting professionals before entering into a contract for purchase to better understand how to deal with these financial burdens.

This article is informational only.  For advice on your specific situation, consult your legal advisor.