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Increase to capital gains tax will cause a flood in the cottage market

Changes to the capital gains inclusion rate, as announced in the recent federal budget, are stirring up waves in the Muskoka cottage market, warns a local realtor. The alterations, slated to take effect on June 25, will ramp up the inclusion rate on capital gains above the initial $250,000 from 50 to 66 percent.

For cottage owners, this shift carries weighty implications. Many have watched their property values soar in recent times, prompting them to contemplate selling before the new tax regulations kick in. According to Fincham, a broker at Re/Max Parry Sound Muskoka Realty, there has been a surge in new listings following the announcement, with more cropping up daily.

The Ontario cottage scene has already been navigating choppy waters since the onset of the pandemic, with prices taking a dip and sales volume dwindling over the past year. Fincham estimates a 25 percent decline in the Ontario market already, with the possibility of a further five percent drop by the third quarter of 2024.

The impending changes won't just impact real estate transactions; they'll also cast a shadow over estate planning. Multigenerational cottages, in particular, face a significant challenge, given the heightened exposure from a capital gains perspective. Many families are scrambling to reassess their strategies for passing down cottages, with Fincham advising owners to seek valuations promptly and consult their accountants.

As a consequence, numerous properties are anticipated to change hands, both through conventional market channels and private, familial arrangements off the market. Amidst prevailing interest rates, pandemic-induced buyer remorse, and a wave of baby boomers looking to unload, listing volumes have more than doubled since last year, even prior to the tax bombshell.

Moreover, the duration that cottages spend on the market has already doubled, with potential for further escalation. Fincham sees the new tax rules as a potential tipping point for a substantial correction. "The level of concern that this could be the last straw for a serious correction, not just with cottages, is very high," he remarked.

In conclusion, the impending increase in capital gains tax rates has set the stage for a tumultuous period in the Muskoka cottage market. Owners are hastily weighing their options, and realtors are bracing for a surge in transactions and complex estate planning scenarios. As the countdown to June 25 accelerates, the fate of Ontario's cottage market hangs in the balance, with stakeholders nervously awaiting the fallout of these regulatory changes.



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