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Getting ready to buy a cottage?

August 1, 2023

Maybe you’ve been dreaming about owning a vacation property for years… a place to get away from it all and maybe even live full-time?

Here are some tips on buying a cottage from Angela Iermieri, a financial planner with Desjardins!

You don’t have as many financial responsibilities as you used to. So maybe you’re thinking it’s time to finally treat yourself to that lakeside cottage, mountain cabin or country retreat you’ve been dreaming about. But like all important decisions in your life, a cottage shouldn’t be an impulse purchase. Read on to see if you’ve thought of everything!

Can you afford it?

If you’re seriously considering buying a vacation property, you’re probably pretty sure your budget can handle it. But to give yourself peace of mind and avoid any unpleasant surprises, you should go over your retirement budget in detail and include all the costs of cottage ownership.

Angela Iermieri recommends answering a few questions to see if a cottage can work with your retirement budget:

  • Will you sell your main home and downsize? Or move to the cottage full time?
  • Will you get a loan for the cottage or pay for part (or all) of it from your savings?
  • If you sell your main home, will you add the proceeds of the sale to your retirement savings?
  • Have you factored in additional costs (for example, mortgage, property taxes, insurance, maintenance and renovations)?
  • Will you have enough money for an emergency fund to cover any unexpected expenses that come up for your properties?
  • Do you have the time and money needed to maintain a cottage?

Thinking about renting out your cottage?

Cottages are a popular choice for vacations, so maybe you’re thinking about covering part of your mortgage with rental income. Careful! This will have an impact on your income tax bill. Any rental income earned on your cottage will be added to your taxable income, meaning it’ll be taxed.

What about taxes?

Assuming you don’t earn any rental income, a cottage won’t have an impact on your income taxes until you sell it. But when this happens, it may generate a taxable capital gain equal to the difference between the original purchase price and the sale price.

One option to reduce your tax bill when you sell could be to designate your cottage as your main residence for one or more years to take advantage of a partial or full capital gains exemption. But you won’t be eligible for this exemption for any years that you earned rental income. Other restrictions may also apply, so be sure to speak to a tax specialist!

In addition to tax considerations, you also need to consider municipal rules that apply to short-term rentals. Angela Iermieri explains that you may need a permit, and there could be an impact on your insurance. So make sure you know what you’re getting into before renting out your cottage.

Choosing your dream property

Once you’re sure you can afford it, you’ll need to decide on the type of property you’re looking for.

Answer the questions below to narrow down your list.

  • Are healthcare services available nearby (for example, a hospital or clinic)?
  • Can you get internet and cable hookups? Cell service?
  • Will you be close enough to your family and friends?
  • How much space do you need? How many bedrooms and bathrooms?
  • How often do you plan on going to the cottage?

Buying a cottage: A big decision

Like for all big purchases, you need to think carefully before buying a cottage. Make sure you list all the pros and cons before making your final decision.

Your advisor would be happy to help. And while you’re making your decision, keep this in mind: the point of buying a cottage is to have a place to relax, not to increase your level of financial stress!