Estate Planning and Ethics

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Course Name :- Estate Planning and Ethics

Maggie:        Chapter 11        Capital Gain – House vs Cottage       (12 marks)

Maggie bought a house which was quite a dump in 1989 for $75,000. She fixed it up with paint and wallpaper but in 1996 she did a major renovation which cost $50,000. In 1993,she bought a dump of a cottage for $35,000because it was both on a lake and near some good cross-country ski trails. She winterized it immediately for $10,000.Over time, the dumpy cottage has become quite attractive with the addition of a new roof, siding, windows and doors all of which cost $15,000in 1995. In addition, she is fond of landscaping and has created quite a beautiful garden. I might add that Maggie has only $40,000 in RRSPs since she prefers to sink her money into her living space.

In July 2006, Maggie lost her job and received $60,000 in severance pay. She put as much as she could into her RRSP (included in the $40,000 above) and put the rest in GICs to help finance her plan. Maggie had been taking courses for several years to become a Master Gardener.

When she lost her job, she decided to live out her dream of having a gardening business where she would design gardens for others with cottages near her and maintain them if they needed it because they mostly come to their cottages on the weekend to relax. In the winter, she will keep the lanes clear (with her snow blower) and check up on the cottages now and again. She gave her corporate clothes to her friend Kate with the proviso that she could stay with her when she comes to the City (which won’t be often because she is very fed up).

When she lost her job, she immediately started renting out the housefor $1,600 a month plus utilities. She still has to pay the $2,400 a year taxes and maintenance but figures the house will be her retirement fund. When she started renting out the house, it immediately ceased to be her principal residence– her cottage is now her principal residence. In July 2006, her house was worth $300,000and the cottage is worth $140,000.

Questions:

a.    Maggie’s house increases in value at about 3% a year from 2006 and she sells it in 2017. How much is her taxable capital gain on the house ignoring real estate commissions?

b.   Maggie’s cottage also increases 3% a year in value. If she also sells it in 2017in order to buy a bed and breakfast, how much is her taxable capital gain?

Show all reasoning and calculations:

 

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