You can picture it now: Gathered around the warm fire, drinking hot chocolate with your grandkids, everyone’s cheeks red from a lovely day of skiing. Or maybe gathered around the barbque on your deck overlooking the Gulf of Mexico, watching the grandchildren make sandcastles, everyone’s cheeks red from sunburn.
Either way, you have a vision of buying (or keeping) a second home to pass down the generations. What could go wrong? Plenty, but let’s go through the pros and cons.
Pros
- Providing a property where descendants can gather to enjoy family time without paying the full cost of a vacation with hotel fees.
- Passing down the property after your death will give your kids a step-up in cost basis. When they do go to sell (if ever), their capital gains tax will likely be lower than yours would have been.
- Real estate can appreciate over time and be a nice diversifier in your investment portfolio.
- Potential rental income to your heirs if they decide to make some money on the asset.
Cons
Most of the cons fall under one umbrella. That is the potential conflict caused by your kids inheriting a property to share when you are no longer around to call the shots and pay the bills. Ask yourself these questions:
- Can the kids equally afford to pay for the upkeep of the property (HOA dues, repairs, utilities, etc.)?
- Do the kids live somewhat equidistant to the property, allowing them to all reasonably make use of the home?
- Would any of your kids benefit more from having their share of the property value in cash rather than partial use of a house?
- If conflicts arise, is there a way for inheritors to buy each other out of the property? Can they all afford this equally?
- Is it likely that one inheritor will use the property much more than the others?
- Will there be resentment if one inheritor bears the brunt of the work in maintaining the residence?
And last, have you run the numbers to see if keeping up the property, plus having all that money tied up in home equity, is healthy for your own retirement finances?
I’m not speaking as a financial advisor so much as a person who has watched friends and clients wrestle with the logistics and conflict of sharing an inherited vacation home. Sometimes it goes well. Often, it does not.
The key is transparency all along the way. If you have even a hint that sharing the property will cause conflict among your kids after you are gone, consider selling while you still have your wits about you.
