Buying out a sibling or buying your parents' cottage

Shared family cottages almost always reach a point where one person wants out and another wants to keep it. Or parents want to hand it to one of the kids while they are still around to enjoy it. Either way, someone needs to pay someone, and that usually means a mortgage. Here is how it works.

Step 1: agree on value

Get an independent appraisal from an accredited appraiser who knows the lake. A realtor’s opinion is useful, but a formal appraisal is harder to argue with and closer to what a lender will rely on. The lender will usually order its own appraisal too, and that is the number it lends against.

Use recent completed sales of comparable properties on the same lake or nearby competing lakes. Match road access, waterfront quality, lot size, condition and permitted use. Provincial reports and asking prices cannot establish what one cottage is worth.

Step 2: work out the buy-out amount

If the cottage has a mortgage, the share being bought is usually based on equity, not the full value. Example: the cottage appraises at $900,000 with a $300,000 mortgage. Equity is $600,000. Buying out a sibling’s one-third share means paying about $200,000, while taking on the full $300,000 mortgage plus whatever you borrow for the buy-out.

Step 3: choose how to fund it

Mortgage default insurance is not available on a refinance, so any new borrowing on an existing cottage is uninsured. Check how much room your home has with the home equity calculator, and confirm you can carry everything with the affordability calculator.

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What lenders will ask for

• The signed agreement between the owners or with your parents, showing the price for the share.
• The appraisal, plus the lender’s own appraisal, which is the value it lends against.
• Your income and credit, since you will now carry the whole cottage payment alone.
• A current statement for any existing mortgage on the cottage.
• Details on the cottage itself: water, septic, road access and heat, which affect which lenders will finance it.

The family discount trap

Parents often want to give a child a break on price. Under Canadian tax rules, selling to a related person below fair market value usually backfires. The seller is taxed as if they received full market value. The buyer’s cost is only what they actually paid. The difference can end up taxed once now and again when the child later sells.

There are cleaner ways to help, such as selling at full value and gifting part of the cash separately, or a formal loan. Your accountant can compare them. Siblings count as related persons for these rules too.

Tax for the person selling

• The sibling or parent selling reports a capital gain on their share. Half of the gain is taxable, since the inclusion rate stays at 50%.
• If they designated the cottage as their principal residence for some years, part of the gain may be exempt. See principal residence designation.
• Land transfer tax generally applies to what the buyer pays for the share. Your real estate lawyer will confirm the amount.

Put it in writing

Even between people who love each other, a written agreement protects the relationship. If you co-own with siblings, check your co-ownership agreement first. It may already set how a share is valued and how long the others have to arrange financing. If there is no agreement, our guide to buying a cottage with family or friends lists what one should cover.

When the buy-out happens through an estate

If the cottage passes through a parent’s estate and one child wants to keep it, the estate may need cash for the tax bill and to treat the other children fairly. That child often finances the payout the same way. Read passing the cottage to your kids for how that tax is triggered.