If you inherit a family vacation home, you’ll get more than just a beloved vacation property and the memories that come with it. You’ll also inherit both money-making opportunities and potential unexpected tax liabilities. An inherited vacation rental can be a profit windfall—either from the instant equity after selling it or the rental income from renting it out to vacationers.
Let’s dissect the advantages and disadvantages of each, and highlight some of the tax implications to be aware of.
Should I rent the inherited property?
If it is already rented, leaving your inherited vacation rental as-is is the path of least resistance. It may also be the most profitable option, as it’s already earning rental income.
Let’s examine the pros and cons of renting out your inherited property:
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| Rental income from renting out the home to travelers. You could likely earn even more during the high season. |
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The overwhelming amount of obligations as a vacation homeowner. You’re now in charge of bookings, marketing, cleaning, assisting guests, handling repairs, and more. A full-service vacation rental property manager—like Vacasa—can take these day-to-day tasks off your shoulders. |
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| Newfound control over the vacation rental rates. You can set rates based on demand and other factors. |
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Taxes on your rental income. If you rent out your vacation home for more than 14 days out of the year, you may owe federal income taxes on your earnings. | ||
| The freedom to increase the home’s value to guests with interior design that will boost bookings, marketing for better visibility, and focusing on getting 5-star reviews. |
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The responsibility to keep your vacation rental (and your guests) safe and secure. This includes keeping a consistent maintenance schedule, screening guests, preventing parties, and installing smart smoke and carbon monoxide detectors. | ||
| The option to spend your own vacations at the home. (At Vacasa, we don’t limit the number of owner holds on your property.) |
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Property taxes and any HOA fees, which can vary widely based on location. | ||
| Tax deductible vacation rental expenses. |
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Ever-changing local vacation rental laws and regulations. | ||
| Extra time to see what happens with the real estate market and to potentially allow your home’s market value to grow. |
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Higher insurance. If you inherited a beach condo or house, you could be charged higher insurance rates due to possible severe weather. | ||
| The option to rent out the vacation rental to friends and family for free or at a discounted rate. |
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Should I sell the inherited property?
Say your inherited home requires too many renovations. Or, is located in an area that doesn’t receive enough vacation rental income to offset the maintenance and mortgage costs. Or, perhaps you’d rather cash out and invest in saving for college or splurge on a much-deserved luxury getaway. In these cases, it could be better to sell your inherited property.
Here are some pros and cons to consider:
Pros |
Cons |
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| You could receive a large sum of money, depending on how much of the total mortgage has been paid down and the current state of the real estate market. |
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You could end up selling the home for less than it’s worth as a vacation rental. We recommend working with a real estate agent that specializes in vacation rentals, who will understand how to position the property to maximize your profit. |
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| Your proceeds can go towards living costs, paying off debt, saving for retirement, or reaching other financial goals. |
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You could also earn less if you sell the vacation home as soon as you inherit it, as the value could possibly increase over time. | ||
| You’re free from the responsibility of managing and maintaining a vacation home and serving guests. |
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If the home’s appraised value is less than the mortgage balance, you may not make a profit off the sale. | ||
| You don't have to pay annual property taxes. |
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The emotional toll. Clearing out the belongings of your family member and selling their home can be difficult. | ||
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You’ll miss out on the potential to enjoy a stream of rental income. | |||
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Do I pay taxes on inherited property?
Generally, yes—depending on what you do with the property and where your loved one owned the property. These taxes may include:
- Inheritance tax: Several states levy an inheritance tax, which you’ll have to pay as a beneficiary. These states include: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.*
- Capital gains tax: You’re liable for paying capital gains tax when you sell the property. Though you may be able to defer paying capital gains tax with a 1031 exchange to replace the vacation rental with another investment property.
- Rental income tax: Want to continue renting out the vacation home? IRS taxes your rental income, somewhat like earned income from a job. However, you may be able to lower your tax burden by writing off tax deductible vacation rental expenses.
Who can help me with my inherited property?
There are a lot of logistics to sort through if you inherit a vacation rental. To make the most financially sound decision, consult professionals who can help guide you based on your specific property and situation.
Some professionals to turn to:
- An accountant to help you understand hidden costs and any taxes you owe.
- A lawyer to guide you through the probate process.
- A financial advisor who can help guide your financial decisions.
- A full-service vacation rental manager (like Vacasa) who can offer market information, plus manage your inherited property on your behalf, including marketing, setting rates, cleaning, guest service, and more.
Inheriting a rental property—such as a vacation rental—poses several financial opportunities, along with new homeowner and tax responsibilities. This article outlines the pros and cons of two common ways to handle an inherited property—either selling it or renting it out to vacationers for rental income. Whatever you choose, make sure your decision is tailored to your specific needs and financial goals.
Inheriting a vacation rental property FAQ
It depends. Some inheritances—such as an inherited vacation home—may not be considered income for federal tax purposes. However, taxes that you may have to pay include:
- Any capital gains if you sell the property.
- State inheritance tax if your loved one lived or owned the property in a state that collects it (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania).
California Proposition 19, which passed in November 2020, eliminates a California parent’s ability to leave their children or grandchildren their estate with a low tax assessment. However, there is one exception—if the heirs live in the property as their principal residence within one year. In other words, if you inherit a California property and live there, the home’s value will remain the same. However, if you don’t live in the property, and decide to rent it out, the tax will be reassessed at today’s value and will likely go up.
When you inherit rental property, you’ll benefit from a step-up basis. This means that you’ll inherit the property at its current fair market value on the date of the inheritance, not based on the date your loved one bought it.
A step-up basis can potentially—and dramatically—decrease (or even eliminate) accumulated capital gains that have built up over time, possibly over several decades. When you decide to sell, you’ll only be taxed on the gains from the time you inherited the property and when you sell it.
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Disclaimer: This publication is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual's legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this reason, you are advised to consult with your own attorney, CPA, and/or other advisor regarding your specific situation.
The information provided here is for your use and convenience only. We have taken reasonable precautions in the preparation of this material and believe that the information presented in this material is accurate as of the date it was written. However, we will assume no responsibility for any errors or omissions. We specifically disclaim any liability resulting from the use or application of the information contained in this publication.
California licenses
Vacasa Seasonals Inc.
California DRE #02160171
Vacation Palm Springs Real Estate, Inc.
California DRE #01523013
Vacasa offers property management and other real estate services directly through Vacasa LLC and through Vacasa LLC's licensed subsidiaries. Click here for more information about Vacasa's licensed real estate brokerage/property manager in your state. Vacasa’s licensed real estate brokerages/property managers include: Vacasa Alabama LLC; Vacasa Arizona LLC; Vacasa of Arkansas LLC; Vacasa Colorado LLC (Micah Victory); Vacasa Delaware LLC, 302-541-8999; Vacasa Florida LLC; Vacasa Illinois LLC 481.014072, Micah Victory Managing Broker Lic# 471.021837; Vacasa Louisiana LLC, Dana MacCord, Principal Broker, ph 504.252.0155 (Licensed in LA); Vacasa Michigan LLC, 602-330-9934; Vacasa Missouri LLC, Vicki Lyn Brown, Designated Broker; Vacasa Nevada LLC; Vacasa New Hampshire LLC,45 NH-25, Meredith, NH 03253, Susan Scanlon, Broker of Record; Vacasa Minnesota, Broker: Micah Victory, license #40877637; Vacasa New Mexico LLC, 503-345-9399; Vacasa New York LLC, 888-433-0068, Susan Scanlon, Real Estate Broker; Vacasa North Carolina LLC; Vacasa Oregon LLC; Vacasa Pennsylvania LLC; Vacation Palm Springs Real Estate, Inc., California DRE #01523013, Mark Graham, California DRE #00700720; Vacasa Real Estate LLC (licensed in Texas, Debra Brock, Designated Broker); Vacasa Real Estate LLC (licensed in Washington, Robert Brush, Designated Broker); Vacasa Seasonals Inc., California DRE #02160171, Lisa Renee Stevens, California DRE #01485234; Vacasa South Carolina LLC; Vacasa South Dakota LLC; Vacasa Tennessee LLC; Vacasa Vacation Rentals of Hawaii LLC, 69-201 Waikoloa Beach Dr. Ste. #2F17, Waikoloa, HI 96738; Vacasa Vacation Rentals of Montana LLC, Terah M. Young, Licensed Property Manager; Vacasa Virginia LLC; Vacasa Wisconsin LLC; Vacasa Wyoming LLC. In Canada, this advertisement is provided by Vacasa Canada ULC, CPBC lic. number 75826, 172 Asher Rd. V1X 3H6 Kelowna, BC.
