Capital gains changes spur cottage market ‘anxiety.’ Will owners rush to sell?

Click to play video: 'Canada’s cottage country could see a price increase in 2024, report finds'
Canada’s cottage country could see a price increase in 2024, report finds
After seeing a slight drop in prices last year, a new Royal LePage report is forecasting prices in Canada's cottage and cabin market to increase this year. As Sean Previl reports, the expected interest rate cuts, combined with higher demand and lower supply could mean Canadians wanting to buy that vacation home may need to do some extra budgeting – Mar 20, 2024

Looming changes to how capital gains are taxed are spurring some “anxiety” in Canada’s cottage country, some real estate experts say, as owners fret over whether they should rush to sell before the proposals from the 2024 federal budget come into effect this summer.

Budget 2024, tabled by the Liberal government two weeks ago, included a change to the inclusion rate for some capital gains, which are the net profits from the sale of an asset like a stock or investment property.

The proposed changes, set to take effect on June 25, 2024, would see the inclusion rate for capital gains raise to 66.7 per cent for individuals realizing more than $250,000 in annual capital gains. Any such gains worth less than that bar will continue to face the current inclusion rate of 50 per cent.

While principal residences remain exempt from capital gains taxes, secondary properties like investment units or a cottage that’s not an individual’s primary home do face the inclusion rate when sold.

Story continues below advertisement
Click to play video: 'Budget 2024: Taxes on capital gains explained'
Budget 2024: Taxes on capital gains explained

Owners in some of Canada’s recreational property have been worried about the impact the new changes could have on their family cottages, according to experts who spoke to Global News.

Re/Max Canada president Christopher Alexander says agents in recreational markets across the brokerage’s national network have been fielding lots of inquiries about the impact of the proposal capital gains taxes on cottage properties.

For anyone who is trying to get their property sold and the transaction closed before the June 25 deadline, Alexander tells Global News that the listing should be going up by the end of this week at the latest.

This is also the time of year when many cottage owners are in clean-up mode after the winter, tidying up their property, removing downed trees and getting ready for the summer season.

Story continues below advertisement

The timing of the budget’s release means that sellers will be under “immense pressure and strain” to get a property cleaned and listed to facilitate a quick enough sale, Alexander says.

How will capital gains changes affect cottage owners?

Mark Pedlar, broker with Re/Max Bluewater Realty in Grand Bend, Ont., on the shores of Lake Huron, says his team has been meeting with clients over the past two weeks who are wondering if they should list a property now and try to beat the new tax rules.

“There’s a lot of chatter. A lot of people have anxiety about it. A lot of people feel that it’s going to affect them a lot more than probably it will,” he tells Global News.

Financial news and insights delivered to your email every Saturday.

But Pedlar advises anyone who’s thinking about selling a cottage in the next few months take their time to sit with an accountant to figure out exactly how much their sale would be impacted by changes to capital gains — if at all.

Story continues below advertisement

In order for a property seller to pay higher capital gains on the sale of their cottage, they would need to realize a net profit on the sale of more than $250,000. In the case of joint owners, like a married couple, those proceeds would have to top $500,000 to face higher capital gains taxes, Pedlar notes.

Click to play video: '‘I’m not in favour of it’: Doug Ford on federal plan to raise capital gains tax'
‘I’m not in favour of it’: Doug Ford on federal plan to raise capital gains tax

Anyone who bought a cottage in the past five or so years likely won’t be seeing that much appreciation if they’re thinking about selling today, Pedlar says. The changes are more likely to impact an individual owner, someone older who bought a cottage at a very cheap price 40 years ago and could be selling for $1 million today, he gives as an example.

Both Alexander and Pedlar say that anyone trying to execute a quick sale in today’s cottage market might have to give a discount on price to grease the wheels.

Story continues below advertisement

Alexander says that anyone weighing the timing of a pending sale will have to gauge whether they’ll save more by compromising on price to beat the capital gains taxes, or by giving the property longer on the market to get the valuation they had in mind.

“You’d have to probably price so aggressively that it would offset any potential losses or extra taxes you’d be paying,” he says.

Pedlar says at the end of the day, “no one likes paying more taxes,” but it’s unlikely to drive a surge in listings. He’s been telling clients that if they can sell quickly for the price they want ahead of the June 25 date, that’s great, but he doesn’t see it fundamentally changing the equation for most sellers in the market today.

“There’ve been a few people that we have sat down with and said, ‘Oh, you know, I’ve got to sell the cottage now because we’re going to get hit even higher with taxes on capital gains,’” Pedlar says.

“But as soon as you start doing the math for them and start talking to them about it, it’s like, ‘OK, well maybe this isn’t as bad as it sounds, or maybe it’s not as bad as it could be.’”

Click to play video: 'Scott McGillivray and Debra Salmoni share the keys to making a rental property a success'
Scott McGillivray and Debra Salmoni share the keys to making a rental property a success

Alexander gives one exception to cottage owners who may want to get the wheels on a transaction sooner than later.

Story continues below advertisement

Anyone who owns a recreational property and was considering passing the title down to the next generation would be incentivized to do that before June 25, because even if a deal is done for a nominal fee or without cash changing hands, capital gains will be realized on the handover based on the price of the property when it was purchased to the market value today.

“If you are passing your cottage on to a family member, I would actually encourage you to do that before the 25th, because it’s going to mean a lot of extra expense if you don’t,” Alexander says.

Tight inventory as owners hold onto cottages, Re/Max projects

On Tuesday, Re/Max released its 2024 Cottage Trends Report projecting that nearly two thirds (64 per cent) of cottage owners surveyed are planning to hold onto their properties in 2024.

The survey, conducted by Leger in March before the release of the 2024 federal budget in April, led Re/Max to project there would not be a flood of new listings hitting the recreational property market this year.

Story continues below advertisement

Even with pressure from the capital gains tax changes, Alexander says he sticks by that forecast.

He says that many Canadians view cottages less as an investment and more of a “second home.” They’re willing to hold tight to their waterfront real estate in many cases through financial hardship, he argues.

“It’s really interesting how many people thought right out of the gate, ‘Oh my God, cottages are going to be the first domino to fall,’” Alexander says of the reaction to capital gains changes.

Amid an ongoing lack of inventory in cottage country, Re/Max is projecting a 6.8 per cent hike in average sale prices in 2024.

For the first quarter of the year, roughly half of recreational markets in Ontario (54 per cent) are seeing annual price declines, but Re/Max expects values to rise overall before the end of 2024. The majority of markets analyzed in Atlantic and Western Canada were already seeing price hikes in the first quarter of 2024, the report said.

Young families and couples are being cited as the significant drivers of activity in 59 per cent of recreational markets across Canada, according to Re/Max realtors surveyed as part of the report.

That’s a shift from six years ago, when retirees were the dominant demographic in 91 per cent of markets, the report noted.

Story continues below advertisement

Alexander says the changing demographics are largely a legacy of the COVID-19 pandemic and the persistence of hybrid and remote work opportunities. Younger Canadians are increasingly seeing the recreational market as a viable place to build a home, even if they have to commute into work two or three times a week, he says.

Cottages are also gaining prominence as a first home purchase, according to Alexander, thanks to their relative size and affordability to properties in Canada’s bigger cities.

The cottage market could therefore benefit this year as elevated interest rates box some prospective buyers out of the most expensive housing markets, he argues.

“We know that a lot of Canadians want to own real estate. They see the long-term benefits,” Alexander says. For a lot of them, that means exploring options outside the city limits, and cottage country is reaping the benefits of that.”

Wondering if a cottage is right for your first home? Read Global News’s Home School series, which teaches Canadians everything they need to know about buying a home that they didn’t learn in the classroom.

Click to play video: 'Can renters achieve financial security without home ownership?'
Can renters achieve financial security without home ownership?

Sponsored content