If you own a vacation home and are thinking of selling, read the following to determine your right course of action.

Moving Out or Moving In

A number of families hold on to their vacations homes and ultimately pass them on for younger generations to enjoy. Others decide that they are ready to sell their vacation retreats or move into them permanently during retirement. Once again the IRS steps into the picture and has some rules governing each of these situations.

Leaving Your Vacation Home to Your Heirs

What a nice thing to do—leaving your vacation home to your heirs! The home is likely connected with memories of enjoyable experiences you shared together. If you can afford to do so, it is a wonderful gesture. The IRS rules governing property held by decedents in their estates can be tricky, so it is advisable to talk to your accountant or attorney before you decide to include the property in your will without analyzing the implications.

You can also consider transferring ownership of the vacation home to your heirs before your death. This can be accomplished through a Qualified Personal Residence Trust where you transfer ownership of the property in the form of a gift and retain the right to live in the home for a certain period of time. If you live beyond the term of the trust, the property is generally not included in your taxable estate. Further explanation of this and other estate planning techniques are beyond the scope of this guide, but you should be aware that potential tax-saving opportunities exist.

SUGGESTION: There are sophisticated estate planning techniques which an individual with an estate that exceeds the asset exclusion amount can use to remove real estate from the taxable value of his or her estate. If you plan to leave property to your heirs, it is advisable to discuss your ideas with an estate attorney.

Converting a Vacation Home to a Principal Residence

Many vacation home owners thought ahead when they first bought their retreats: Use it as rental property until retirement, when the principal residence is sold, and the vacation home is converted to a principal residence. It is not a bad idea. The premise is that the vacation home could potentially pay for itself with the rental income generated. The owner can still use the home periodically and rent it out the remainder of the time.

The exclusion of gain on the sale of a vacation home converted to a principal residence will apply when the home is ultimately sold, as long as the home was owned and used as a principal residence for at least two of the five years before the date of sale