Managing estate planning and tax implications in cottage ownership: Insights from Jacqueline Power - September 24, 2025
Fidelity’s Director of Tax and Retirement Research Jacqueline Power, shared her insights on the complexities and strategies involved in managing cottage ownership, particularly focusing on tax implications, family dynamics and estate planning.
Here are some of the key points from her commentary.
Understanding seasonal market trends in cottage sales
Jacqueline highlighted that many cottages are listed for sale in the spring as owners prepare for the new season. This period often prompts owners, especially those nearing retirement, to consider how they will transition ownership. Early conversations about these transitions are crucial to avoid rushed decisions and reduce stress, ensuring a smoother process.
Managing tax implications and capital gains
Cottages can be significant capital assets, depending on market conditions and individual circumstances. When ownership changes through sale, gift, or inheritance, capital gains tax is triggered based on the fair market value. Jacqueline emphasized the importance of ensuring estates have sufficient funds to cover taxes and related costs to prevent forced sales. She also explained the capital gains reserve strategy, which allows spreading the taxable gain over up to five years if payments are staggered, helping manage cash flow and tax brackets effectively.
Addressing family dynamics and usage agreements
Shared ownership among siblings or family members can lead to challenges around scheduling usage, maintenance and cost-sharing. Jacqueline shared a real-life example illustrating how lack of clear agreements can cause friction. She stressed the need for clear communication and formal usage schedules and maintenance plans to ensure fairness and preserve family relationships.
Leveraging trusts for estate and tax efficiency
Placing a cottage into a trust triggers capital gains tax for the transferor but removes the property from the individual’s estate, avoiding probate fees and simplifying beneficiary transfers. Trusts can also protect the property from creditors or divorce proceedings involving beneficiaries. Jacqueline noted that trusts are a valuable tool in estate planning to safeguard assets and manage tax outcomes, though they come with maintenance costs that should be weighed against their benefits.
Maximizing the principal residence exemption
The principal residence exemption (PRE) can reduce or eliminate capital gains tax on a cottage if it qualifies as the owner’s principal residence, meaning it is ordinarily inhabited, such as spending significant time there during the summer. Since only one property per family unit can be designated as the principal residence after 1981, families must decide which property to designate. Proper use of the PRE can result in significant tax savings, and Jacqueline encouraged careful consideration of this designation.
Conclusion: proactive planning for a lasting legacy
Cottage ownership is a valuable asset that requires thoughtful planning to preserve wealth and family harmony. Jacqueline’s insights underscore the importance of early discussions about succession, tax-efficient transfer methods, family agreements and legal structures like trusts. Utilizing strategies such as capital gains reserves and the principal residence exemption can help minimize tax liabilities and avoid forced sales, ensuring the cottage remains a cherished family legacy.
