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Hidden cottage costs

(Special) - The dog days of summer bring with them many activities and pleasures, including time with family and friends at the cottage.

Canadians have always had a love affair with the cottage - a place to get away, relax and unwind from the hustle and bustle of the city and our daily working lives.

That retreat, however, has some very real costs associated with it that people should be aware of before signing on the dotted line to buy their little slice of paradise.

Canadians generally are optimistic about the recreational property market and are feeling a sense of urgency to buy while interest rates remain historically low, according to the latest Royal LePage survey on recreational properties in Canada.

Cottages are not necessarily cheap investments. The average cost of a 1,000 sq. ft., three-bedroom cottage on a 100 ft. waterfront lot can range anywhere from $177,500 to $625,000 depending on the location, but the cost can soar a lot higher into the millions of dollars in prime areas in British Columbia, Ontario and Quebec.

Lakeside property in particular has appreciated in value, which may sound great but in fact may not be as great as it sounds.

"Lakeside property value has skyrocketed in the last 30 years with the once-affordable cottage now considered a luxury," says Christine Van Cauwenberghe, assistant vice-president of tax and estate planning with Investors Group. "Any gain in value sure sounds like a win but in fact it could be a capital gain - the difference between what you sell it for and the cost to purchase the property, plus capital expenses - which is taxable and could be quite costly for you and your family members in the future."

If you own two homes, you will have to decide which home you're going to designate as your principal residence.

Capital appreciation on your principal residence is tax free, but you pay capital gains tax on 50 per cent of the appreciation on your non-principal residence.

The Canada Revenue Agency's definition of a principal residence is relatively straightforward and precise. A family unit, which consists of the taxpayer, spouse or common law partner and any children under the age of 18, can designate one property per year as its primary residence. The principal residence exemption allows them to claim a capital gains exemption for some or all of the years they lived in the home.

The decision can come down to whether the cottage has appreciated in value more in relation to the city home. In some areas of the country waterfront property may have appreciated more than the city, in which case it might make sense to designate the cottage as your principal residence.

Vacation property insurance is not the same as insurance on your primary home. Cottage policies tend to be more expensive due to increased risk. Costs will depend on the location of the property and whether it is accessible all during the year.

There are other insurance costs you need to be aware of such as purchasing a life insurance policy to cover the mortgage or offset any tax on capital gains your beneficiaries would be left upon your death.

Many cottage owners rent out their cottages for a few weeks in the summer to cover costs. You should disclose this to your insurer so they can make sure you're covered for any damage which might be incurred during the period of rental.

As well, regular mortgage rules do not always apply for cottage properties. Your lender will need to know the condition of the cottage and accessibility to the property and may not be willing to take on the financial risk associated with a rustic island cottage.

And there also are ongoing expenses to consider when purchasing a second property.

"If your cottage is not within a reasonable distance, will you need to hire a maintenance company?" Van Cauwenberghe says. "With cottages being in remote areas that are quiet during the winter months, they are more susceptible to break-ins and theft. Cottage owners wanting to protect their property when they are not there might consider installing a security system, which would add another monthly cost. To fully understand the options available to you it's important to sit down with your financial adviser."

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Copyright 2014 Talbot Boggs

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