How to Separate Loan Interest From Principal

Q: How could you dare claim in a recent column that it would take a “rocket scientist” to figure out what portion of a monthly mortgage payment is interest and what portion goes towards paying off the principal? There is a formula that uses only the most basic mathematical skills, and I think you should reprint it for your readers, some of whom were no doubt insulted by your lack of faith in their mathematical and problem-solving skills. --L. K.

A: No insult was intended. Here it is:

Let’s start with the original reader’s example of a $200,000 mortgage at a fixed rate of 9.375% interest for 30 years with monthly payments of $1,666.

First, calculate the interest portion of the payment by multiplying the mortgage balance by the annual interest rate. Then divide the result by 12, for the number of months in the year:

0.09375 x $200,000 = $18,750.

$18,750 12 = $1,562.50. This is the interest portion of the monthly payment.

Now subtract the interest from the total payment ($1,666 - $1,562.50 = $103.50) to get the principal portion.

In subsequent months, the principal must be reduced by the amount of the previous month’s payment allocated to it before the formula can be re-run. ($200,000 -$103.50 = $199,896.50). So, to calculate the split in month No. 2, the formula would look like:

0.09375 x $199,896.50 = $18,740.30

$18,740.30 12 = $1,561.69. This is the interest portion. The principal portion is $104.31.

You can repeat these steps another 358 times to make yourself a complete mortgage amortization schedule for the 30-year life of your loan.

One word of warning for holders of adjustable-rate mortgages: You must change the interest rate in this formula whenever your loan rates are adjusted for your calculations to be accurate.

Assets Are Valued at the Time of Death

Q: I understand that the tax basis of inherited property is its value on the date of death of the donor. What happens if the asset left by the deceased has lost value since its acquisition? Can the recipient choose between the stepped-up basis and the original basis? Also, I know that when spouses hold their assets as community property, the surviving spouse is entitled to value his or her half of the property as of the deceased’s death. But does this also include raw land? --A. G., A. B.

A: Assets bequeathed at death are valued as of the donor’s date of death, regardless of whether they are worth more or less than the donor paid for them. Recipients have no choice in the matter. And if you think about it, why would Uncle Sam want to give a recipient the right to claim a loss he never really suffered?

Consider this example: Your uncle leaves you 2,000 shares of stock at his death. He paid $12 per share for it, but it is worth just $8 per share at his death. Selling it for $8, you would realize proceeds of $16,000, tax free. Why should Uncle Sam additionally give you an $8,000 “investment loss” for the stock’s decline in value? You didn’t suffer that decline. Your uncle really didn’t suffer it either, since he never sold the stock. The loss, such as it is, goes unrecognized--and undeducted.

Is raw land treated as other assets in a community property estate? Of course!

Three Points Needed for an Exemption

Q: I was divorced in 1980. My ex-wife and I were supposed to sell our home the following year. Instead, we both moved out and let our daughter live there, rent free. She finally moved this year and my ex-wife and I sold the house and split the profit. I have heard that the Internal Revenue Service allows homeowners over age 55 to claim the $125,000 tax exclusion in cases such as ours. Should I attempt to claim my exemption? --F. M. B.

A: No, you clearly don’t qualify for the exemption. Remember, there are three criteria that all homeowners must meet to qualify for the one-time exclusion of $125,000 of home sale profits from taxation. They are: the taxpayer must be at least age 55. (In the case of a married couple, at least one spouse must be age 55.) The house being sold must have been the principal residence of the taxpayer for three of the last five years. And, neither spouse has used this exemption in the past.

You plainly do not meet the second requirement because the house you sold was not your principal residence for three of the five years immediately before the sale.

Way to Check on Foreign Holdings

Q: I recently purchased stock in three foreign companies. I cannot find a publication that will keep me up to date on their current values. Can you help? --E. G. W.

A: If the stocks you purchased were in the form of American Depository Receipts, commonly knows as ADRs, you can track their performance on the daily stock exchange listings carried in this and most other newspapers. More than 850 foreign companies, usually the largest and best known in the world, have taken the necessary steps to allow their stock to be traded in the United States in this way. If you invested directly in a foreign company, you can check the foreign stock tables carried in such financial publications as the Wall Street Journal, Investors Daily and Barron’s magazine.