Here's How High-Net-Worth Families Are Handing Down Vacation Homes Without Tax Headaches

For many higher-income families, a vacation home is more than a luxury: It's a legacy. But passing down a beloved second home can create more stress than memories if you don't plan it right.

Without the right structure, your heirs could face massive capital gains taxes, estate headaches, and even painful family disputes. Fortunately, more high-net-worth families are getting ahead of the problem and handing down their properties the smart way.

The tax trap that catches too many families

When a vacation property appreciates in value, the potential tax liability can be huge. That's especially true if:

• The home is gifted during your lifetime and then sold (triggering capital gains based on your original purchase price), or
• The home isn't held in a structure that allows for a step-up in basis at death

Many families also forget that real estate counts toward their total taxable estate. With the estate tax exemption expected to drop in 2026, more families could find themselves unexpectedly above the threshold. The federal estate tax exemption is currently $13.61 million per person, but many states have much lower thresholds.

The result is a cherished home becomes a financial burden or gets sold to cover tax bills.

Strategy No. 1: Let beneficiaries inherit it -- don't gift it

One of the simplest and most powerful moves you can make is to hold on to the home until you die, so your heirs get a step-up in basis if the home has appreciated in value. This can eliminate most capital gains taxes if they decide to sell shortly after inheriting.

Gifting the home now might feel generous, but it could come with a six-figure tax bill your kids never saw coming.

Smart move: If you plan to keep the home in your family, consider adding it to your estate plan, not your gift plan.

Strategy No. 2: Use a trust or LLC to protect and manage the property

More high-net-worth families are transferring vacation homes into revocable trusts or limited liability companies (LLCs) to make inheritance smoother and more tax-efficient.

Benefits include:

• Avoiding probate
• Clarifying ownership among multiple heirs
• Providing protection from legal or creditor issues
• Establishing rules for maintenance, usage, or even buyouts

A well-drafted LLC agreement can be especially helpful if you're leaving the home to multiple children -- and want to prevent future fights over scheduling, upkeep, or whether to sell.

All of this can get complicated, but a financial advisor can help. A short questionnaire from our partner, SmartAsset, helps match you with up to three fiduciary financial advisors, each legally bound to work in your best interest.

Strategy No. 3: Plan for ongoing costs

One of the biggest reasons vacation homes become a point of contention is maintenance costs. Property taxes, insurance, and repairs don't stop -- and not every heir may want to (or be able to) contribute equally.

That's why many families:

• Set aside a separate fund for upkeep
• Add guidelines for selling if certain triggers are met
• Allow for one heir to buy out the others at fair market value

Strategy No. 4: Talk to your family now -- not later

No matter how carefully you structure things legally, nothing replaces a clear conversation. Share your intentions, explain your plan, and give your family a chance to ask questions. The more they understand today, the smoother the transition will be tomorrow.

Talking it through with your family and a financial advisor helps ensure everyone is on the same page. Our partner SmartAsset's secure quiz matches you with up to three fiduciary financial advisors who have passed a rigorous vetting process.

Preserve the home -- and the harmony

A vacation home can be a source of joy for generations or a source of conflict and cost. The difference comes down to planning.

By using trusts, LLCs, and tax-smart timing, you can pass down your property without handing over a headache. And more importantly, you'll preserve what matters most: the connection it represents.