Cabins were all the rage in recent years past—and that’s precisely why they’re still an investing hot topic in 2024.
The COVID-19 pandemic compelled the Bank of Canada to drop its overnight lending rate to an historic low of 25 basis points. The result was predictable: a frenetic rush for housing across the country. However, because employees had by then begun working remotely, they suddenly had the freedom to live anywhere and cabin country became a natural destination.
Recreational property prices in Quebec rose by 24.5% year-over-year in 2021, and in Ontario they surged by 34.6%. Those located on waterfronts increased by 26.4% and 31.8%, respectively.
But that scorching, unanticipated explosion of buyer demand for cabin properties now poses a dilemma. Following years’ worth of demand frontloading into a span of roughly a year and a half, the cabin market experienced such a rapid pace of price increases that sales activity softened on account of there being too few buyers willing, or capable, of meeting those thresholds.
Signs of risk then appeared in the cabin market when the Bank of Canada implemented an aggressive quantitative tightening regime that left some of the more impetuous among those buyers unsure they would be able to renew their mortgages at higher rates in the immediate years ahead. And because cabin prices still hadn’t moderated enough to renew demand, some sellers, desperate to sell, were left regretting their purchases.
Cabins remain sound investments
However, in the years since, Canadian cabin markets have largely returned to normalcy. Unlike the residential housing market, which remains buoyed by imperatives like population growth and has therefore only experienced modest corrections, fewer complicating factors govern Canada’s cabin markets.
But while that once again makes cabins, as an asset class, a shrewd addition to one’s portfolio, these purchases aren’t for the uninitiated because cabins are infamous for their confusing tax structures.
Cabins are considered capital assets, so if they are not designated as your principal residence (principal residence are exempt from capital gains) and passed down to a family member, there will be tax implications. If left to an heir in a will, the cabin will be deemed to have been sold at fair market value and any increase in value, minus the cost of improvements, will be considered capital gains and taxed at the deceased’s marginal tax rate. This could trigger a $100,000 to $200,000 tax bill, which in the worst-case scenario could require the beneficiary to sell the property in order to pay it off.
One way to prepare for such a capital gains bill is through a family-funded life insurance strategy. As mentioned, it is also important to track all expenses that go towards improving the cabin, as they could provide a little additional tax relief.
Rather than leaving it to your heirs in a will there is also the option of creating a trust that owns the cabin. This is deemed a disposition by the Canada Revenue Agency but it’s a strategy that could help avoid legal issues in the future. Moreover, the parents can still control the cabin and name their children as beneficiaries. It would also avoid probate issues later on.
Trusts require separate tax returns, which can be somewhat confusing, but by having a deed of gift, because cabins are often the subject of intense litigation between family members, courts put them through estates. Moreover, trusts are also needed to satisfy questions pertaining to who has rights to the cabin, as well as when, and who is responsible for maintenance or further development. Trusts can also dictate whether sale to a third party is permitted. In short, trusts ultimately preclude internal family squabbles over the cabin.
Another option is to sell up and give the proceeds to the kids, letting them decide what to do with the money. This is the unsentimental option, but it may be the best way forward for your family, removing future complications or potential conflicts.
A shadow looming over the capital gains issue is the recent changes that took effect on June 25, 2024. For those whose cabin has skyrocketed in value it pays to be aware that the inclusion rate increased to 66.7% for those realizing more than $250,000 in annual capital gains. Gains below this threshold remains at 50%.
Before the pandemic, it was uncommon for people to rent out their cabins, but with all flights grounded, cabins became popular short-term rentals. And the trend is as strong as ever today. But potential cabin purchasers should consider it is important to buy a cabin in the right place. Although cabins are most popular in the summer, certain places that offer year-round activities will yield cabin owners even better returns on their investment.
Canadians are already jumping headlong back into the recreational housing market. Royal LePage anticipates 8% growth in the single-family recreational home market in 2024 in Ontario alone, and 5% nationally, which would bring average prices to $662,148 and $678,930, respectively.
However, there are also a lot of deals to be had out in the cabin country, following the massive rush north when COVID-19 hit. Moreover, with the last federal budget increasing the capital gains tax rate, many cabin owners are contemplating whether or not they should list their properties by the June 25 deadline. In that respect, there are indeed opportunities to be found on the market.
And for those contemplating a cabin purchase solely for leisurely enjoyment, it is imperative to sit down with your children when planning the estate and determine everything from who wants to use it and who doesn’t, how that affects a non-resident child, and who will be responsible for its upkeep.
All of these questions and more require the guidance of a trusted wealth advisor.
