Are you thinking about renovating your vacation property? As long as you’re on top of the paperwork and keep your receipts, whatever you spend may minimize capital gains tax when you sell the property or leave it to your kids.
How it works
Upgrades to your property that are considered capital expenses are added to the property’s adjusted cost base, which reduces the capital gain that’s triggered when the property is sold or transferred.
Capital improvements are typically larger expenses that transform the property. Examples include:
- Putting an addition on the building
- Insulating so you can use the property year-round
- Building a deck or boathouse
- Drilling a well
- Upgrading parts of the structure, such as rebuilding the dock and replacing windows, roof or septic tank.
Expenses that do not qualify include general repairs, maintenance or cosmetic upgrades like painting.
Other tax strategies
There may be other ways to ease the tax burden as well. For instance, if you sell the property and agree to hold a mortgage, you may be able to spread the capital gain over five years.
You may want to consider designating the vacation property as your principal residence, so you can claim the principal residence exemption. The drawback, however, is that claiming the exemption on your vacation property will expose you to capital gains tax on any increase in the value of your regular property.
Tax planning is a complex area, so be sure to consult a qualified tax specialist before undertaking any strategy.