What Sellers Need to Know About Closing Costs When Selling a Home or Cottage in Muskoka

What Sellers Need to Know About Closing Costs When Selling a Home or Cottage in Muskoka

When preparing to sell a home or cottage in Muskoka, it is natural to focus on the sale price. But the amount a seller ultimately receives is not simply the selling price shown on the Agreement of Purchase and Sale.

There can be a number of expenses associated with selling and closing a property, and understanding them in advance can help sellers plan more accurately and avoid surprises as closing approaches.

For Muskoka cottage owners, there may also be tax, legal and property-specific considerations that differ from those involved in selling a typical year-round residence.

What Closing Costs Can a Seller Expect?

Every transaction is different, but some of the more common expenses sellers may encounter include:

• real estate commission and applicable HST
• legal fees and disbursements
• mortgage discharge or related lender fees, where applicable
• adjustments for property taxes and certain other property expenses
• moving, storage or property preparation expenses
• possible tax obligations depending on how the property was owned and used

There may also be costs unique to a particular property or transaction, which is why sellers should obtain advice from their lawyer, accountant or tax professional when appropriate.

Real Estate Commission

Real estate commission is generally one of the most significant selling expenses and should be discussed with your real estate representative before listing.

The commission structure should be clearly set out in the listing agreement so sellers understand the amount and applicable HST before the property goes to market.

Legal Fees and Disbursements

A real estate lawyer plays an important role in completing the sale. Among other responsibilities, the lawyer typically reviews closing documents, addresses title-related matters, manages the transfer of funds and completes the legal aspects of the transaction.

Legal costs vary depending on the transaction and whether additional work is required.

What Happens If There Is a Mortgage?

If there is a mortgage or other registered financing on the property, it will generally need to be addressed as part of the closing process.

Sellers should contact their lender well before closing to understand whether there are discharge fees, penalties or other costs associated with paying out the mortgage.

Mortgage penalties can vary considerably depending on the lender and the terms of the mortgage, so this is an expense that should not be estimated without confirming it directly with the lender.

Property Tax and Other Adjustments

Property taxes and certain other expenses may be adjusted on closing so that the buyer and seller are each responsible for the appropriate portion.

For example, if a seller has already paid property taxes covering a period beyond the closing date, an adjustment may be made through the statement of adjustments prepared for closing.

What About Capital Gains on a Muskoka Cottage?

This is an especially important consideration for cottage owners.

According to the Canada Revenue Agency, a cottage can potentially qualify as a principal residence if the applicable requirements are met.

However, families who own both a primary home and a cottage should not assume automatically that the entire gain on the cottage will be exempt from tax.

The property's use, ownership history, principal residence designations and other circumstances can affect the tax treatment.

The CRA also requires property sales to be reported, including the sale of a principal residence. Sellers can review the CRA's real estate income and property sale guidance for additional information.

Because tax circumstances are individual, sellers should speak with a qualified accountant or tax professional before relying on an estimate of potential capital gains tax.

What If the Cottage Was Rented?

Rental use can introduce additional tax considerations.

If a cottage has been used to generate rental income, particularly for a significant period of ownership, sellers should discuss the circumstances with their accountant or tax advisor before the sale closes.

Records relating to the original purchase, improvements, renovations and certain selling expenses may also be important when determining the property's adjusted cost base and any potential gain.

Keep Records of Major Cottage Improvements

Owners of long-held Muskoka properties sometimes underestimate the importance of maintaining records for substantial capital improvements.

Depending on the circumstances, qualifying capital expenditures may affect the property's adjusted cost base for tax purposes.

Invoices and documentation relating to significant improvements such as additions, major renovations, boathouses, docks, septic systems and other substantial property improvements should therefore be retained and reviewed with a qualified tax professional.

Closing Costs Should Be Considered Before Setting Your Selling Strategy

Understanding anticipated selling expenses before listing provides a much clearer picture of the potential net proceeds from a sale.

This can be particularly important when sellers are deciding whether to accept an offer, determining their next purchase budget or planning an estate or family cottage transition.

A strong selling strategy considers not only what a property may sell for, but what the seller is likely to retain after the transaction is completed.

Frequently Asked Questions

Does the seller pay land transfer tax in Ontario?

In a typical Ontario resale transaction, land transfer tax is generally a buyer expense rather than a seller closing cost. Individual transactions can differ, so sellers should confirm their circumstances with their lawyer.

Does selling a cottage automatically create capital gains tax?

No. A cottage can potentially qualify for the principal residence exemption if the applicable requirements are met. However, the tax treatment depends on the owner's individual circumstances, and professional tax advice is recommended.

Do I have to report the sale of my principal residence?

Yes. The Canada Revenue Agency requires the disposition of a principal residence to be reported on the seller's income tax return, even where the principal residence exemption applies.

Can selling expenses affect the calculation of a capital gain?

Certain outlays and expenses incurred to sell a property can be relevant when calculating a capital gain. Sellers should retain documentation and have their accountant or tax professional determine which expenses qualify.

Should I calculate my net proceeds before listing?

Yes. Estimating commission, HST, legal expenses, mortgage-related costs and other anticipated expenses can help sellers understand approximately what they may receive after closing.

Are closing costs different for a Muskoka cottage than for a regular home?

Some costs may be similar, but cottages can involve additional considerations such as principal residence designation, capital gains, rental history, estate ownership and significant capital improvements. These issues should be reviewed with the appropriate legal and tax professionals.

Planning to Sell Your Muskoka Home or Cottage?

Understanding the financial side of a sale is an important part of preparing a property for market.

At the Weiland Team, we help sellers look beyond the asking price and consider the complete selling strategy, from preparation and positioning through negotiations and closing.

For legal, accounting and tax matters, we encourage sellers to obtain advice from the appropriate qualified professionals so important decisions are based on their individual circumstances.

Thinking about selling your Muskoka home or cottage?

We would be pleased to help you understand the market, prepare your property and develop a selling strategy designed around your goals.

Your Muskoka Dream Starts With The Weiland Team.

Visit LuxuryMuskokaRealEstate.com

```