As the end of the year approaches many real estate investors who have put off certain bookkeeping items address them or maybe specific tasks penciled in to be accomplished before the end of 2013 are dusted off for quick work. And since most discount points deductionoperate under a calendar year for income tax purposes, it’s time to think about discount points and deductibility, too.

 

A discount point, commonly referred to simply as a “point” is expressed as a percentage of the amount borrowed. A point is a form of prepaid interest to the lender and may be paid to the mortgage company in return for a slightly lower interest rate on the loan. For example, say you’re buying a duplex for $300,000 and closing next December. You have the choice of paying points—or not.

Lenders offer a wide range of available interest rates for all programs they offer, from 15 year fixed rate loans to 30 year terms. Say the lender offers you a 30 year fixed rate of 4.75 percent with no points. On a $300,000 loan, the principal and interest payment works to $1,564 per month.

That same lender can offer a rate one-eight percent lower in exchange for one-half of a point, or $1,500. The new payment on 4.625 percent is $1,542, or $22 lower. You could swap $1,500 for a $22 per month savings. A lender might also offer 4.50 percent with one point, or $3,000 and the new payment would be $1,520. It’s up to you and your loan officer to decide if paying points, or not, is right for you.

Now let’s look at deductibility. Points paid for a purchase are fully deductible in the tax year paid. If you paid $3,000 for a point this year or before the end of this year on a purchase, you can deduct that from your taxable income. With a refinance, you may also deduct any points paid but only amortized over the life of the loan. A 30 year loan with $3,000 in points would let you write off $100 per year until the loan is retired.