There are so many sentiments attached to the place you and your family call home during the summer. Everyone looks forward to vacation and the chance to get away from the city… but have you thought about what happens to that special place after you’re gone?

Most people leave the cottage equally to their children in their will. However, when children have children of their own and begin their own family traditions, will they agree on who can use the cottage for a particular week during the summer? Talk with you children before deciding who gets the cottage in your will. Some of them may not want the hassle of scheduling cottage use or paying for upkeep and bills. They may suggest the best thing is to sell the cottage.

Assets can incur capital gains tax upon death of their owner. In the case of a cottage that’s been in the family for decades, rising property values could result in significant capital gains. Vacation property values in some parts of Canada have multiplies 10-fold or more. Half the growth in value since 1971 is taxable income in the year in which the property is disposed of, either by death or sale of the property. An estate plan can help minimize these capital gains taxes.

Your principle residence exemption can offset a large portion of capital gains tax. A number of conditions must be met for a property to qualify as your principle residence. As of 1982 you can have only one principle residence per tax year. In some situations or tax years, you might want to designate the cottage as your principle residence, but in others it might make more sense to designate your home. Whether it’s your home or the cottage, the property not elected as your principle residence is subject to capital gains tax, just like any other growth asset.