You love cottage life and spend most summer weekends either renting a place or visiting the cottages of friends and relatives. Is it time to buy your own?
“If you buy a cottage, you are acquiring an appreciating asset,” says Chartered Accountant Rolland Vaive of J. Rolland Vaive Professional Corporation in Orleans. “Some people have done very well financially from selling their cottages.”
A major benefit of cottage ownership is being able to spend more time at a place you love. “People work so hard today,” adds Vaive. “Buying a cottage forces them out of the city and into a lifestyle that perhaps sees them working five days a week instead of seven.”
Cottage ownership also provides an opportunity to make new “summer” friends and to share family activities. “It changed my way of life,” says Chartered Accountant Dennis Brabant, a partner with Brabant & Kretzschmann in Midland. “I used to spend most Saturdays at the office before buying my cottage. Now the grandchildren are starting to enjoy the cottage and it has brought our family closer together.”
But the attractions of cottage ownership can be outweighed by one big drawback—the cost. “A cottage is expensive to own,” says Brabant. “In addition to the initial investment, you will have many other expenses, such as cottage repair and maintenance, buying and maintaining a boat and property taxes. Also be prepared to roll up your sleeves, because if you own a cottage there is always something that needs to be done.”
Renting a cottage is less expensive than buying, and there are no hidden costs. But at the end of the rental period you have no asset. “It’s also rare to find a cottage available to rent for the whole season,” adds Brabant.
If you do decide to rent, be sure to visit the site in advance and check out reviews by previous renters. “So much enjoyment is based on a cottage’s physical surroundings,” says Vaive. “You want to be sure you like it.”
If you are leaning towards buying a cottage, be sure to consider the impact on your financial plan. “If you are taking money out of your investments or borrowing to buy a cottage, it may have a detrimental effect on your financial plan,” says Vaive. “While the cottage will have value and becomes part of your net worth, you may never realize the gain because you may leave the cottage to your children instead of selling it.”
Keep in mind that if you do sell your cottage for more than you paid for it, after including all the capital improvements you have made, the gain is taxable. “You can shelter the capital gain through the principal residence exemption, but then the sale of your house won’t be sheltered,” advises Vaive. “It can be a very complex decision, so you should get professional advice on how to handle the capital gains implications.”
One way to reduce the cost of owning a cottage is to rent it out for part of the year. “Renting it will help you recover your costs, but renters usually want it during the prime summer vacation period,” says Brabant. “You may not want to lose access to it during that time of year.”
If you are thinking about buying a cottage, be sure to talk over the pros and cons with a Chartered Accountant. “Your CA can look at your overall financial plan and help you decide whether the cost of buying and maintaining a cottage will leave your finances too tight,” says Vaive. “Your CA can also help you understand the tax implications of selling your cottage, if and when the time comes.”
The Institute of Chartered Accountants of Ontario is the qualifying and regulatory body of Ontario’s 33,000 Chartered Accountants and 5,000 CA students. Since 1879, the Institute has protected the public interest through the CA profession’s high standards of qualification and the enforcement of its rules of professional conduct. The Institute works in partnership with the other provincial Institutes of Chartered Accountants and the Canadian Institute of Chartered Accountants to provide national standards and programs that are used as examples around the world. </em>
