In recent months Ken MacCoy, a principal with Rite Partner Financial Services in Chilliwack, B.C., has seen at least three retirement-age clients snap up vacation properties in California, Arizona and Mazatlan, Mexico. Unlike most Canadian homeowners with deeds to only one property, these three buyers have also kept their principal homes in Canada.
“They made the decision to maintain two homes – one as their principal residence and another as their vacation home,” Mr. MacCoy says.
Mr. MacCoy’s clients are among the enviable group of Canadians who are choosing to keep two homes in retirement. There are no confirmed statistics on Canadian retirees who own vacation properties in the country or abroad, but financial planning and real estate experts say this is a small but growing group.
The combination of a healthy Canadian dollar and plunging real estate prices in the United States has put a second home within the reach of many Canadian retirees, Mr. MacCoy says.
“There have been so many foreclosures down there and the prices have been so appealing,” he says. “And if you made your purchase when the Canadian dollar was worth more [than the U.S. dollar] then you would have gotten an even better deal.”
Whether they’re buying a beachfront condominium in Florida or hanging on to the decades-old family cottage up north, retirees need to consider the financial and logistical implications of owning a second home, says Michael Taglieri, a financial adviser with Assante Capital Management Ltd. in Mississauga, just west of Toronto.
There’s no question that a vacation home brings many benefits for its owners, Mr. Taglieri says. In addition to being a getaway destination, a vacation home can also be a source of income and tax savings for retirees.
“You can rent it out during those times when you’re not using it,” he says. “And because rental income is considered business income, part of your costs – such as mortgage interest, maintenance and property improvement expenses – would actually be tax deductible.”
The disadvantages? Rent money is taxable income, Mr. Taglieri says. At the same time, as the property increases in value, owners face a higher capital gains tax if and when they sell their second home.
They may be able to reduce their tax liability on capital gains from their vacation home by designating it as their principal residence, which is exempt from capital gains tax. But this makes sense only if the increase in value of their principal home is less than that of their vacation home.
Retirees with vacation properties outside of Canada could also incur tax liabilities in the country where their second home is located, Mr. Taglieri says.
“For example, if you’re renting out a second home in the United States, you would file a U.S. income tax return because you’re earning income in the U.S.,” he says. “And when you sell the property, the capital gain would be subject to U.S. estate taxes.”
Retirees need to keep in mind that owning a second home would mean a second set of costs for property maintenance, improvement and insurance, says Renee Talavera-Siao, a financial adviser at TriMonarch Financial in Toronto.
There’s also the cost of travelling to a vacation home – something frequently overlooked by retirees too excited about a good real estate deal. Ms. Talavera-Siao points to some clients who snapped up bargains in distant countries where housing markets were depressed, only to realize later it was going to cost thousands each year to fly to their vacation home and pay for out-of-country health coverage.
Investing in a vacation home could also curtail retirees’ plans to travel to other destinations, Mr. MacCoy says. To keep his own retirement travel options open, Mr. MacCoy has chosen to buy into a timeshare that lets him stay at various properties in Canada, the United States and Mexico.
People tend to be in an optimistic frame of mind when they’re buying a vacation home for retirement. But it’s also important to plan for contingencies – such as failing health – that would make it necessary to sell the second home, says Julie Wilson, author of Beyond the Sold Sign: A Canadian Real Estate Planning Guide for Seniors.
“Make sure you have the proper arrangements in place for selling the house,” she says. “Plan for the worst, and put your intentions in writing so it’s clear to your family what you want to do even if you’re too ill to speak for yourself.
Mr. Taglieri agrees, noting that an estate plan for a vacation home is especially critical for retirees with children.
“Vacation properties are probably the most disputed assets in estate litigation in Canada, partly due to the fact that they mean different things to different members of the family,” he says. “One child may love the family cottage while his sibling may want to have nothing to do with it.”
Estate arrangements for a vacation home are typically based on each family’s circumstances, Mr. Taglieri says. For instance, in cases where the children tend to use the vacation home frequently, it may be a good idea to transfer ownership of the property while the parents are still alive.
“You trigger capital gains at that point but save on probate fees,” Mr. Taglieri says. “If you are going to go this route, however, keep in mind that the vacation home effectively becomes the property of your children and you’ll need to get their consent to use it.”
However they decide to structure the estate plan for their vacation home, retirees should make sure they work with professionals such as real estate and tax lawyers, Mr. Taglieri says.
“And involve your family members in the planning process,” he says. “Your vacation home should be a place to enjoy, not something that becomes a burden for you and your family later on.”
Thinking of a second home for your retirement years? Here are a few pointers to keep in mind:
– Do your due diligence. Before you buy, know how much you’ll need to pay in taxes, maintenance costs and travel. If you’re buying abroad, consult with a lawyer or accountant who knows the tax rules in Canada and the country where your vacation home is located.
– Have an exit strategy. There may come a time when you’ll no longer be able to travel to your vacation property. Make sure you have a plan for selling your second home and have identified professionals who can help you.
– Let the family in on it. Ask your children and siblings to help you create an estate plan for your vacation home. If you’re passing the property to them, make arrangements to ensure they don’t end up with a hefty bill for capital gains tax and probate fees.