I borrowed $20,000 from my mother in 1996, but only repaid $5,000. She deducted the entire loan from my inheritance. I need that money. What now?

“When mom made out her will, she produced my letter from 1996, which stated that I did not repay the loan. This is the only evidence of the transaction.” (Photo subject is a model.) – Getty Images

Dear Quentin,

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When we sold our late mother’s house last year for $600,000, the equity was supposed to be divided equally by us four siblings (around $146,000 each). In 1996, I borrowed $20,000 from my mother interest-free to help buy my condo. I promised to pay her back in two years.

I managed to pay her back $5,000 in six months. But I made terrible decisions in my finances and I lost my high-paying job. My budget couldn’t afford to pay her back. I was terrified to tell her. She was extremely angry at that time, so she deducted $20,000 from my inheritance.

Long story short: I defaulted on mom’s loan. When mom made out her will, she produced my letter from 1996, which stated that I did not repay the loan. This is the only evidence of the transaction. I want to have the CPA redo the taxes to show that I paid part of the loan off.

When I called my sister, mom’s power of attorney, she was so upset. She said, “F— you, never talk to me again!” I was shocked! She has never talked to me this way in 75 years. I understand her anger because this is a mess and she’s a hero for doing such a wonderful job as a power of attorney.

I too am upset, but I need every cent of my inheritance. I live in a semi-expensive assisted living facility, and I’m not in good health. On top of that, Medicare only pays part of my health bills. Do you have any suggestions on how to fix this mess, without having to redo our taxes for 2022?

Cash-Strapped Son

“Your mother lent you this money almost 30 years ago, but did not record it on her tax return, and as such it is most likely considered a gift by the Internal Revenue Service.” – MarketWatch illustration

Dear Cash-Strapped,

You’re digging a dry well.

I’m sorry that you lost your job during your peak earning years. But given the timeline involved, it’s hard to accept that you could not have repaid your mother $15,000 over 28 years. It’s time to get real and acknowledge your part in this family drama. This loan should have been a priority for your budget. If you gave your mother $50 a month over that period, the loan would have been paid before she died.

Your mother lent you this money almost 30 years ago, but did not record it on her tax return, and as such it is most likely considered a gift by the Internal Revenue Service. In 1996, the annual gift tax exclusion was $10,000 , so your mother effectively gifted you twice the eligible amount. Given that your mother passed away last year, it seems like that boat has sailed.

If you wish to amend your mother’s 2022 tax return, it’s years too late. And if you think that amending your mother’s return will restore your full $146,000 inheritance, you’re sadly mistaken. She appears to have left a will stating that she wanted $20,000 deducted from your inheritance. You can’t undo that by adjusting your or your mother’s tax returns.

Gift versus personal loan

From what you write in your letter, it seems like your mother effectively gifted you this money, at least in the eyes of the IRS. “When someone lends you money and doesn’t charge you interest, or charges a below-market rate compared to the IRS’s current applicable federal rate, the IRS might consider the loan a gift or require them to pay income taxes on imputed interest,” Experian EXPGY says.

If this was an official loan, however, the IRS requires a bad-debt statement, explaining the details. “You must deduct a bad debt in the year it becomes worthless. If you realize you could have reported and taken a deduction for an unpaid debt years ago but didn’t, you generally have only three years to amend your return in order to claim it on your tax return,” according to TurboTax INTU.

Even in that situation, your mother would likely not have been able to deduct a bad debt from your unpaid loan. “It’s a short-term capital loss, so you must first deduct it from any short-term capital gains you have before deducting it from long-term capital gains,” TurboTax adds. “You can deduct up to $3,000 of any remaining balance from other income.” But that’s all water under the bridge now.

A decade-long drama

Rather than think about what you are owed, look at it from your family’s perspective. You are the one who defaulted on a loan and a promise. That $20,000 would be equivalent to nearly $30,000 in purchasing power in 2024 — and that doesn’t account for the equity your mother “invested” in your home, which likely appreciated by the time you sold it. No one has done you a bad turn: not your sister and certainly not your mother.

Perhaps your sister is frustrated that years after this loan went unpaid, you are attempting to cause her more work by recording this $5,000. That amount is chump change in the larger scheme of your inheritance. Your mother helped you out financially when you were buying your condo. Don’t turn this good deed into a three decade-long drama. You know that you paid off part of the loan. You don’t need that recorded by the IRS.

Your sister is probably less annoyed by the fact that you did not repay the rest of the $20,000 loan, and more frustrated by the fact that you are trying to turn a bad debt dating back to 1996 into a payday in the wake of your mother’s death. It’s a hard story to sell that it’s not fair you missed out on $5,000 in your mother’s will when you failed to repay $15,000.

Focus on what you do have in your life, and make amends to your sister.

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on X, the platform formerly known as Twitter.

The Moneyist regrets he cannot reply to questions individually.

Previous columns by Quentin Fottrell:

‘I don’t want my wife to lose everything’: I’ve been diagnosed with dementia — I suddenly could not spell or write legibly

‘Things have not been easy’: My sister is a hoarder and procrastinator. She is delaying probate of our parents’ estate. What can I do?

‘I gave up a job that I loved passionately’: My husband secretly set up a trust that includes our home and his investments. What should I do?

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