Inheritance in Roundabout Way

[bumrocks]

My biological father let my mother's new husband adopt me when I was a small child. Legally and technically I was not his son anymore. As an adult I was around him for many years. Nobody from his side of family knew that technically I was not his son. My father passed away a year and a half ago. When he did, he had no wife and his only remaining next of kin was his brother. I explained the situation to my Uncle and how he was going to actually inherit my father's paid for house. He said he would not have it, and that it was mine.  Long short, I was named the executor while estate was in probate, has come out of probate, and my Uncle sold the property to me for $1 via a quitclaim deed about 2 weeks ago. I am now days away from closing on the sale of property for $325k. What am I looking at as far as tax obligations? How can I protect or shield the money as much as possible. What should I absolutely not due with the money that many are mistaken about doing? A promise was made by my dad, which I am honoring, that a close friend of his who looked after the property would receive 10% of the sale of property minus any taxes and related costs. How can I figure that amount to be, at least roughly?  

Thank you in advance of any and all that advise in this matter. 

[Hi Palms]

What state are you in and what did the probate judge say about the inheritance? In quite a few states, children of a biological parent can still inherit from that parent after a stepparent adoption. If you're in one of those states, you should call your lawyer. 

Kind of a mess otherwise because your Uncle would have taken a stepped up basis which would be the FMV of the property when your bkological father passed. Your Uncle would have then made a gift to you of the house so your basis would be the FMV on the date your biological father passed or the FMV on the date of the gift, whichever is less, and your Uncle will have to file a gift tax return - Form 709. Your gain would probably be the sales price less sales expenses minus your basis of $325k assuming the property did not appreciate or depreciate between the date your bio father passed and the date of the gift from your Uncle.

If you give 10% of the proceeds to your father's friend, you will likewise have made a gift and will have to file Form 709 to report it. 

You should speak with a local attorney about this entire situation.

[AmeliesUncle]

The short answer is you will likely have minimal-to-no tax, and could even have a deductible tax loss due to selling costs.

Personally, I don't see a need to contact an attorney about the situation.  Your uncle inherited the property, so his "Basis" (similar to cost for tax purposes) is the Fair Market Value on the date of your dad's death.  When he transferred/gifted it to you, you took over his Basis.

For example, let's say the Fair Market Value on the date of your dad's death was $315k and you have $20k of selling expenses.  You would end up with a $10k deductible loss ($325k selling price minus $20k of expenses, minus your "Basis" of $315k).

But as Hi Palms mentioned, your uncle is supposed to file a Gift Tax return for giving you the property (although no tax will likely be owed) and you'll need to file a Gift Tax return for giving your dad's friend over $19k (unless you split it up and only give $15k-ish this year and then the other $15k-ish next year, because both annual gifts are under the $19k threshold).

[Hi Palms]

Personally, I don't see a need to contact an attorney about the situation.  Your uncle inherited the property

I udnerstand your position but the Uncle inheriting the property IS a potential issue because some states allow adopted kids to inherit from BOTH their adoptive parents and their natural parents. If the natural father passed in one of those states the OP would be the one who should have inherited the house, assuming no will or other testamentary doc, not the Uncle. Not sure what the probate court decided but they're busy and may not have taken the OP's relationship into consideration....or the judge wasn't aware of the law which happens a LOT.

[AmeliesUncle]

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@Hi Palms wrote:

If the natural father passed in one of those states the OP would be the one who should have inherited the house, assuming no will or other testamentary doc, not the Uncle. 

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How would that change anything?

Other than the uncle not needing to file a Gift Tax return, it is the same result.  Either way, the OP owns the property and his Basis is the FMV at the date of death.  

[Hi Palms]

How would that change anything? Other than the uncle not needing to file a Gift Tax return

Well, that would be it. OP would still own the house but the Uncle wouldn't have to file and use part of his lifetime exemption, but that might not be an issue for him anyway. 

[AmeliesUncle]

It doesn't seem logical to me to incur the cost of hiring a lawyer to 'fight' the legal inheritance vs the cost of the uncle filing a Gift Tax return.  It seems like the cost of the uncle filing a Gift Tax return would be far less than the lawyer fees that accomplish mostly nothing.

[Hi Palms]

I assumed they already had a lawyer since the property went through probate. They should probably contact that lawyer if they want to avoid filing the 709 and use part of the exemption. You're right in that it's probably not worth the time to contact another lawyer and pay for this.