For many families, the idea of inheriting a vacation home sounds like hitting the jackpot. A beachside condo, a cabin in the woods, a ski chalet nestled in the mountains—these aren’t just properties. They’re places packed with memories. But before you pop the champagne, take a hard look at the fine print. What feels like a sentimental gift could quietly morph into a money pit.
Over the next couple of decades, trillions of dollars in assets will be transferred as baby boomers pass on their wealth. Real estate makes up a big chunk of that, and not just primary residences. Second homes, rentals, and vacation getaways are also part of the so-called Great Wealth Transfer. But inheriting one comes with more strings than many realize.
The Paperwork Comes First. Then the Price Tag
When someone dies, their estate goes through probate—a legal process that settles debts, distributes assets, and ensures everything is distributed to the right individuals. It can take months, sometimes years, especially if there’s disagreement or complicated ownership involved. Once that’s done and the title is officially in your name, the house is yours. So are all the costs.
Many people view inheritance as a form of free money. A house, after all, is a tangible thing. However, second homes, unlike primary residences, tend to accumulate costs quickly. Property taxes, maintenance, insurance, and possibly even mortgage payments can pile up. And if the house is out of state, you’ll be booking plane tickets, renting cars, and spending weekends doing work most people pay others to avoid.
What You Really Inherit
Beyond the keys and the family photo albums, you might also be inheriting:
- Unpaid property taxes or liens – These might not be cleared in probate, and guess who’s now responsible? You.
- Immediate repairs – A vacation home that sat vacant for months might need everything from a new roof to basic plumbing fixes.
- Ongoing maintenance – From mowing lawns to clearing gutters, upkeep does not stop—especially in areas with extreme weather.
- Travel costs – If you live in Chicago and the house is in Florida, managing it means hopping on a plane more often than you’d like.
Suddenly, that dreamy lake house starts feeling more like a second job.
Location Can Change Everything
What makes all this more complicated is that every state has its own rules. In Connecticut, for instance, you could be hit with a gift tax if the property was handed over before death. If the value exceeds $13.9 million, you’re in tax territory—even if the gift came with good intentions.
Rhode Island has been floating a “Taylor Swift tax”—named for the pop star’s high-profile real estate holdings. It targets luxury homes that are used for short-term rentals. If it passes, anyone inheriting a ritzy vacation property and turning it into an Airbnb could be looking at a steep new tax bill. Even if it doesn’t become law, the message is clear: states are paying closer attention to how people profit from inherited properties.
California, once a tax-friendly place for family transfers, flipped the script with Proposition 19. Unless you move into the home and declare it your primary residence, you will no longer be eligible to retain the low property tax rate your parents enjoyed. That can double or triple your annual tax bill overnight.
Florida sounds better—no inheritance or estate taxes—but if the home is on the coast, prepare for sky-high insurance premiums and hurricane-related coverage headaches. Rent it out, and you may also owe tourist development taxes.
Selling vs. Holding: What’s the Smart Move?
Thanks to federal tax laws, when you inherit a property, you get a “stepped-up basis.” That means the home’s value resets to the market rate at the time of the previous owner’s death. If you sell it soon, the capital gains tax could be close to zero. Wait a few years, and if the property appreciates, you could owe a hefty sum in taxes on the difference between the stepped-up value and the sale price.
So what are your options?
1. Move in full-time
If you make the inherited property your primary residence, you may be eligible for local tax breaks or protections. But this usually requires more than just changing your address on paper. You’ll need to actually live there most of the year, file your taxes from that address, and prove it is your primary residence. For someone who doesn’t already own a home—or is willing to relocate—it can be a smart financial decision. Otherwise, juggling two homes is rarely cost-effective or easy.
2. Use it as a vacation home
This route can feel like the most natural: keep the home in the family, use it for holidays, and perhaps let close friends or relatives stay there as well. But this is where many people underestimate the ongoing costs. Even if you only visit twice a year, the bills arrive every month. And because vacation homes are often in remote or seasonal areas, finding reliable maintenance services can be trickier—and pricier.
3. Turn it into a rental
Renting the place out can help offset costs or even bring in steady income. However, it comes with its own set of challenges. You become a landlord, which means you’re now responsible for maintenance, tenant issues, and compliance with local regulations. You must also report the rental income and maintain detailed records for the tax season.
Additionally, the market for short-term rentals is becoming increasingly competitive. More cities and states are cracking down on Airbnb-style properties, slapping on new taxes and limiting the number of days a property can be rented each year. It’s not as simple as listing it online and watching the money roll in.
So What Should You Do?
Before making any significant decisions, seek professional advice. A real estate attorney can help you navigate ownership and transfer laws. A tax advisor or CPA can explain the financial implications based on your state and the property’s value.
Inheriting a vacation home is a significant event, both financially and emotionally, and it has legal implications as well. What starts as a generous family gesture can spiral into a high-stakes decision. The home might be full of memories, but make sure it does not empty your wallet.
A gift from the past can shape your future but only if you understand what you’re stepping into. Look before you leap and bring a calculator.
