A vacation home can play many roles in people’s lives. Whether it’s a small weekend cabin or a large home that does or will someday serve as a primary residence, vacation homes are both complex emotional investments and complicated financial investments. They are not just properties, but family retreats that often are intertwined with memories of vacations and family events.
Professional advice is extremely helpful when you are deciding which vacation property to buy, how to manage the investment and how to pass it down to your heirs.
Purchasing the property
If you are thinking about buying a lakeside property, you’ve probably already done quite a bit of daydreaming about relaxing on the beach, fishing from your boat or dock and listening to the loons. But it’s essential to make careful, reality-based decisions when you are ready to take the plunge and buy. Two very important considerations that may call for expert advice are taxes and insurance.
- Taxes: Property taxes on a cabin or vacation home have some unique and possibly quite expensive attributes, depending on where you live. For example, in Minnesota there are many factors that could trigger greater-than-expected tax increases in the future. And you might have to pay additional taxes now, depending upon your lot size, landscaping and groomed beach areas. Finally, if you decide to sell your primary residence and move to your cabin, you may be able to take advantage of a number of tax breaks.
- Insurance: If you live by a lake or invest in watercraft, you could have new and different insurance needs and you may need to seek out special types of coverage and insurance providers. Many people don’t realize that some cabins are actually uninsurable.
Passing the property on to heirs
Many parents are eager to pass the family cabin down to their children or other relatives, in part because recreational property is increasingly expensive and the kids may never be able to make such a purchase on their own. However, it can be difficult to pass property to heirs while keeping the peace among siblings and making sure that taxes won’t be so high that they can’t afford to keep it in the family as hoped.
Capital gains taxes can be triggered when the ownership of a property changes, but the tax bite can be minimized if the property is already the first owners’ principal residence. Another approach is to transfer the ownership over a period of years to spread out the tax payments over time. There are other tax and insurance strategies that can be helpful, depending upon the individual situations and needs of the parents and children.
When doing estate planning, the key is communication and preparation; it’s important to look at both the monetary value and the emotional value that the cabin holds for each of your heirs. The best approach often is to start with an open family discussion, or series of discussions.
Here’s an example: Let’s say you have three children and a cabin that you want to share among them. Two of the children live in Minnesota and use the cabin frequently. The third child lives in California, doesn’t visit often and isn’t interested in owning real estate in Minnesota. You might consider setting up a trust that splits ownership of the cabin between the Minnesota children, while leaving life insurance proceeds and/or other assets to the third child.
Whether you are buying or passing on lake property, there are many financial issues to take into account. Team up with a trusted advisor to make sure you look at all the options. This will help ensure that your financial and emotional lakeside jewel retains its luster.
CFP®, Series 7, 24 & 63 Securities Registrations,* Series 65 Advisory Registration,† Insurance License Mark joined Wealth Enhancement Group in 2001 because of the philosophy of teamwork and strong client focus. He strives to build trust and confidence in clients so they can be free to live their lives without the burden of managing their finances. Mark is a lifelong resident of the Brainerd Lakes area and he and his family enjoy all that northern...Read More