How to keep properties in your family for future generations

Mortgage insurance

The biggest risk a family faces when passing down the cottage or any other secondary properties they own are the capital gains taxes they face.

Taxes need to be paid in your estate due from the increase in value of these properties.

If you bought a family cottage 25 years ago for $150,000 and it’s worth $650,000 today, there is a $500,000 capital gain to face.

Coming up with a strategy to pay this capital gain in the most efficient way, or cheapest way, can save you a lot of money, time and stress.

Most importantly, it will guarantee you can pass down your cottage and properties.

Taxes catch a lot of people off guard. You do not want to be in a scenario where you owe so much money in taxes that you are forced to sell your cottage, rental or vacation properties.

What are the options to pay these taxes?

1) Borrow money from a bank – If it’s financially affordable, you can re-mortgage the property to pay the taxes. This is not an ideal option because you are going into debt to pay off taxes and now the next generation is left with a big mortgage.

2) Cash out investments – Using your RRSPs or RRIF investment is possible, but a very costly option. You could be paying over 50% in taxes on the amount you cash out. Financially speaking, this is not a wise decision if you have other alternatives.

3) Paying in cash – This is a very popular strategy. If you have the cash to pay for the taxes, why wouldn’t you?

Well this is still a very costly option. Paying in cash is a dollar for dollar exchange, meaning if you owe $100,000 in taxes from capital gains, it’s going to cost you $100,000.

4) Permanent life insurance  – When you buy life insurance, you are purchasing a future amount of money that you will need, at a significant discount today.

If you needed $100,000 for capital gains in the future, and depending on your age and health, you could invest approximately 40% of that into a life insurance policy in exchange for $100,000 to be paid out tax-free to cover these capital gains.

You are now maximizing your money and could be saving $60,000 or 60%. This is the cheapest option to pay for your capital gains. 

On top of this, a permanent life insurance policy also comes with an investment account that grows tax-free called the cash value. Even though you contributed $40,000 in premiums, you may have more than this in the cash value. Permanent life insurance is an asset, not a fixed expense.

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