As cottage season dawns, the prospect of joint ownership with family or friends grows anew for many Canadians, budding perennially like a lakeside plant.
Smaller down payments, lower risks and shared experiences all mark the promise of a property partnership with pals and loved ones.
But experts warn that a range of issues need consideration before diving into a cottage co-investment like a kid off the dock.
A candid conversation about finances, long-term life plans and the purpose of the cabin are a good place to start, says certified financial planner Mark Halpern.
Credit is one important area.
In a standard arrangement between co-owners, each is fully liable for the mortgage. That means a late payment or default will affect everyone’s credit scores, notes Halpern, who runs WealthInsurance.com.
Lenders will also average out the purchasers’ credit scores, resulting in a higher-rate mortgage, if one of the buyers has a lower rating.
“You’ve got to know who you’re partnering with,” Halpern said, adding that a variable-rate mortgage typically offers easier outs than a fixed-rate one should the borrowers want to break early.
Ownership schemes mark another key question, with joint tenancy and tenant-in-common arrangements the two main options (in this case, the word tenant refers to owners rather than renters).
For joint tenancy, each owner has a stake in the property, and if one dies their share transfers to the other—similar to a spousal situation. On the other hand, a tenants-in-common agreement allows for different-sized stakes in the property—75 per cent and 25 per cent, for example—and would see the deceased’s share become part of their estate and pass on to their heirs, who would then pay a probate tax, which is roughly 1.5 per cent in Ontario.
Should those inheritors opt out of the investment, the remaining owner in a tenants-in-common arrangement would owe them a hefty amount of money, Halpern said.
“Generally these agreements don’t necessarily contemplate what happens on death, or what happens if somebody wants to be bought out,” Halpern said, adding that people should view a joint property as the investment it is.
Capital gains taxes are another issue if the parties have to sell.
“Imagine you have a cottage you bought for half a million dollars, and now it’s worth a million and a half—so there’s a million-dollar gain—there'd be a $250,000 tax,” Halpern said, noting Ontario taxes capital gains at 25 per cent for a recreational property.
“Being half and half, each side would really have to come up with $125,000 in taxes.”
