Should I buy a cottage with friends or family?

MONTREAL –

As cottage season dawns, the prospect of joint possession with household or pals grows anew for a lot of Canadians, budding perennially like a lakeside plant.

Smaller down funds, decrease dangers and shared experiences all mark the promise of a property partnership with buddies and family members.

But consultants warn {that a} vary of points want consideration earlier than diving right into a cottage co-investment like a child off the dock.

A candid dialog about funds, long-term life plans and the aim of the cabin are an excellent place to start out, says licensed monetary planner Mark Halpern.

Credit is one vital space.

In an ordinary association between co-owners, every is totally answerable for the mortgage. That means a late fee or default will have an effect on everybody’s credit score scores, notes Halpern, who runs WealthInsurance.com.

Lenders will even common out the purchasers’ credit score scores, leading to a higher-rate mortgage, if one of many patrons has a decrease score.

“You’ve got to know who you’re partnering with,” Halpern mentioned, including {that a} variable-rate mortgage usually presents simpler outs than a fixed-rate one ought to the debtors wish to break early.

Ownership schemes mark one other key query, with joint tenancy and tenant-in-common preparations the 2 important choices (on this case, the phrase tenant refers to homeowners somewhat than renters).

For joint tenancy, every proprietor has a stake within the property, and if one dies their share transfers to the opposite — much like a spousal state of affairs. On the opposite hand, a tenants-in-common settlement permits for different-sized stakes within the property — 75 per cent and 25 per cent, for instance — and would see the deceased’s share turn into a part of their property and move on to their heirs, who would then pay a probate tax, which is roughly 1.5 per cent in Ontario.

Should these inheritors choose out of the funding, the remaining proprietor in a tenants-in-common association would owe them a hefty sum of money, Halpern mentioned.

“Generally these agreements don’t necessarily contemplate what happens on death, or what happens if somebody wants to be bought out,” Halpern mentioned, including that folks ought to view a joint property because the funding it’s.

Capital beneficial properties taxes are one other challenge if the events must promote.

“Imagine you have a cottage you bought for half a million dollars, and now it’s worth a million and a half — so there’s a million-dollar gain — there’d be a $250,000 tax,” Halpern mentioned, noting Ontario taxes capital beneficial properties at 25 per cent for a leisure property.

“Being half and half, each side would really have to come up with $125,000 in taxes.”

This report by The Canadian Press was first printed May 25, 2023.