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Whether you enjoy spending time on the ocean, skiing in deep powder, or fishing for trout, tax changes this year may bring even bigger challenges for families with vacation properties.
The June 2024 increase in the capital gains inclusion rate may pose significant financial hurdles for keeping that cherished property in the family. For example, a property bought for $450,000 now valued at $1.45 million could face a tax bill of $334,375. Determine the financial resource that will be needed by the heirs of the property to pay the capital gains taxes of the vacation property. This should be considered both for an unexpected event occurring now and for the inevitable future change. |
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Permanent life insurance —
Create a life insurance policy with the death benefit amount equal to the expected capital gains tax liability. Designate the estate as the beneficiary of the life insurance policy so the estate can pay those taxes. The Principal Residence Exemption (PRE) — Designate the property with highest average annual capital gain over the life of ownership as the principal residence to gain the highest exemption amount. Only one property can be designated in each calendar year of ownership, except in the year(s) of purchase and sale. |
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Other strategies to reduce capital gains include:
Transfer ownership over time — Take advantage of the lower capital gains inclusion rate for the first $250,00 of transfer, per year. For $500k of ownership transfer, consider transferring $250k per year over two years to save on capital gains taxes. Record, record, record — To reduce the total amount of capital gain: Keep a record of the initial property purchase costs. Document the costs of all capital improvements, including renovations, additions, roof replacements, and upgrades. Scan and save all receipts. |