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Dale Jackson

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The enjoyment dividend

Dale Jackson


TORONTO (GlobeinvestorGOLD) — Investment dividends come in many forms. Most are cash distributions, some are reinvested. But more and more Canadians are opting for the enjoyment dividend by investing in vacation properties.

What other investment dividend can give you so much pleasure — and tax free to boot? According to Royal LePage, 10 per cent of Canadians own a recreational property compared with only 6 per cent in 1997. And it seems the investment is paying off. In 2004, recreational property values rose 10 per cent compared with the previous year. That means after years of enjoyment, your vacation property could also be a key portfolio holding.

But like any investment, due diligence is paramount when selecting a vacation property. Mortgage consultant Invis has a few tips for finding the right vacation retreat for the right price. Water is a primary consideration for any real estate purchase but probably more so for a vacation property. Septic systems are strictly regulated by the provinces and municipalities. Make sure there is an up-to-date certificate of approval and permit. When viewing the property walk around the septic tank to make sure there is no seepage, and put your nose to work for any funky smell.

Most cottages draw their water from wells or lakes instead of municipal treatment plants. If water is drawn from a lake, a property filtration system is needed. If it is drawn from a well it must be on higher ground, and a good distance away from the septic tank. A qualified well tester can determine the recovery rate of a well, which indicates how quickly fresh groundwater water flows into the well once it is drawn.

A local tester can also give insight into multi-year water cycles. An ample supply of well water one year does not indicate an ample supply the following year. Drought is always a consideration when you're on a well system.

No matter where you draw your water have it tested at the tap for safety. Most municipal health departments will do the testing for free, or for a small fee.

It's important to get in touch with the local municipality. Find out if the route to your cottage is maintained by the municipality. If it's a private road talk to your prospective neighbours about access and maintenance. Find out about garbage pickup and snow removal in the winter. If there is no garbage pickup find out where the local dump or recycle centre is located.

Ask the municipal planning department if zoning restrictions would prevent you from making changes to the property such as the addition of a dock, a deck or a boathouse. Some zoning regulations ban year-round residency. Also find out about regulations concerning hunting, snowmobiling or boating.

If you plan on doing office work from the cottage make sure the telephone system is updated for Internet access. Most remote areas have basic telephone service but few have high speed Internet capability.

Assuming you already own a principal residence, there are plenty of financing options for a vacation property. Start with the mortgage provider on your primary residence and see if they can meet or beat your current mortgage rate. If you have a significant amount of equity already in your principal residence a down payment for the vacation property should not be necessary. As always don't count on your mortgage provider to tell you if the debt burden is too heavy. Most financial institutions will lend you more than you need.

To offset the mortgage payments on your vacation property consider purchasing it with other parties and dividing its use in equal portions. This approach is commonly referred to as time-sharing and often applies to vacation properties other than cottages. If you want to be the only owner of the property consider renting it out when you're not there. Keep in mind rent payments are taxed as income.

If you consider a vacation property part of your investment portfolio, there are serious estate planning issues to be resolved. Unlike a principal residence, any capital appreciation on a second property is subject to capital gains tax. If you plan on passing your vacation property on to family members, estate planning experts like Christine Van Couwenberghe from Investors Group recommend buying life insurance to cover the tax bill upon death. She recommends getting the kids to pitch in for the cost of insurance and paying the capital gains tax with the payout.

One other option for passing your vacation property on while you're living is a process known as gifting. Giving the cottage to the kids allows you to use your principal residence exemption to shelter the transfer from tax.

Unlike most investments a vacation property often has strong sentimental value and emotion could stand in the way of sound investment decisions. That's why it's important to discuss the matter with each of the stakeholders. Some may not even want the property. Dealing with the future of your vacation property right now will make that enjoyment dividend that much more enjoyable.

Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.

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