If you’re wondering how to pass the family vacation home to the family or sell it in the future, you need to understand how property is transferred. Those details are shared in a useful Spokesman Review article titled “Exit strategy for keeping the cabin in the family”.
The article gives you two options to consider:
- An outright sale to the adult children.Selling the vacation home and renting it back from the children is one way parents can keep it in the family, enjoy it without owning it, and help the children out with rental income.However, the sale of the vacation home will not escape a capital gains tax. It’s likely that the vacation home has appreciated in value, especially if you’ve owned it for a long time. If you have made capital improvements over that time period, you may be able to offset the capital gains.
The capital gain is the difference between the adjusted sales price (that is, the selling price minus selling expenses) and their adjusted basis. The adjusted basis is the original cost plus capital improvements(improvements to the property that is useful for over a year and increases the value of the property or extent its life). Examples are: a new roof, a new deck, a remodeled kitchen, or a finished basement.
- Placing the cabin in a Qualified Personal Residence Trust. A Qualified Personal Residence Trust (QPRT) considers the family vacation home to be a second residence, and is placed within the trust for a specific time period. You decide what the amount of time would be and continue to enjoy the vacation home during that time. Typical time periods are ten or fifteen years.If you live beyond the time of the trust, then the vacation home passes to the children and your estate is reduced by the value of the vacation home. If you should die during the term of the trust, the vacation home reverts back to your estate, as if no trust had been set up.
A QPRT works for families who want to reduce the size of their estate and have a property they pass along to the next generation, but the hard part is determining the parent’s life expectancy. The longer the terms of the trust, the more estate taxes are saved. However, if the parents die earlier than anticipated, benefits are minimized.
The question for families considering the sale of their vacation home to the children is whether the children can afford to maintain the property. One option for the children might be to rent out the property until they are able to carry it on their own. However, that could cause different issues.
Talk with a qualified estate planning attorney about what solution works best for your estate plan and your family’s future.
Reference: The Spokesman Review (April 19, 2020) “Exit strategy for keeping the cabin in the family”