Down payments on rental property are not deductible in the year you pay them
When you buy a rental property, the down payment itself is not a tax write-off. The IRS treats it as part of your property's cost basis — the total amount you paid to acquire the asset. You recover that cost over time through depreciation, a deduction that spreads the building's value across 27.5 years (for residential rentals).
The distinction matters because it changes when and how you get tax relief. You do not deduct $50,000 down in year one. Instead, you deduct a portion of your entire property cost each year for decades, whether or not you put money down at purchase.
What is deductible in the year you buy are the closing costs and fees tied directly to the purchase — but only certain ones, and they follow different rules than the down payment itself.
Key Takeaways
- Your down payment becomes part of the property's cost basis and is recovered through depreciation over 27.5 years, not deducted upfront.
- Closing costs like title insurance, appraisal fees, and attorney fees can be capitalized (added to basis) or deducted immediately, depending on the type of cost.
- Points paid to the lender on a rental property loan are capitalized and deducted over the loan term, not in year one.
- Repairs or improvements made before you rent out the property must be capitalized as part of basis, not expensed immediately.
- Keeping detailed records of every cost at purchase — down payment, fees, repairs — is essential for calculating depreciation correctly.
Which closing costs can be deducted or capitalized
Some closing costs are added to your property's basis (capitalized), which means they increase the amount you depreciate over time. Others are deductible immediately as business expenses. The IRS distinguishes based on whether the cost is tied to acquiring the property or maintaining it.
Costs that are capitalized (added to basis) include title insurance, recording fees, survey costs, appraisal fees, attorney fees for the purchase, and lender points or origination fees. These are part of what you paid to acquire the property, so they become part of the depreciation calculation.
Costs that may be deductible immediately are rarer at purchase. Property taxes accrued before you took ownership can sometimes be deducted in the year paid, depending on your state and the closing agreement. Homeowner association transfer fees or inspection costs for repairs you plan to make are less clear-cut and depend on how they are structured in your closing documents.
The safest approach is to ask your tax preparer or CPA which costs in your closing statement should be capitalized versus expensed. The closing disclosure you receive at purchase lists every fee; bring that document to your tax appointment.
How depreciation works instead of an upfront deduction
Depreciation is the tax deduction you actually use to recover your down payment and other capitalized costs. The IRS assumes residential rental buildings lose value over time, and it lets you deduct that theoretical loss each year.
For a residential rental property, you depreciate the building only, not the land. If you paid $300,000 total and the land is worth $75,000, you depreciate $225,000 over 27.5 years. That comes to roughly $8,182 per year in depreciation deduction, regardless of whether you put down $30,000 or $150,000.
The size of your down payment does not change your annual depreciation deduction — it only changes how much you borrowed and therefore how much interest you pay (which is deductible). A larger down payment means lower interest expense, so you lose that deduction; a smaller down payment means higher interest, which you can deduct annually.
You will need a professional appraisal or assessment to determine the land-to-building split for your property. This is not optional; the IRS requires it, and auditors check it. Do this before your first tax return.
Loan points and origination fees are capitalized, not deducted upfront
If you paid points to the lender — a common way to lower your interest rate — those points are not deductible in year one, even though they are a real cost at closing. Instead, they are capitalized and deducted over the life of the loan.
A point is 1% of the loan amount. If you borrowed $250,000 and paid 2 points ($5,000) to buy down the rate, that $5,000 is deducted ratably over the loan term. On a 30-year mortgage, you deduct roughly $167 per year. If you pay off the loan early or refinance, you can deduct any remaining points in the year of payoff.
Origination fees, processing fees, and underwriting fees follow the same rule: they are capitalized and amortized over the loan term. Only interest itself is fully deductible in the year you pay it.
Pre-rental repairs and improvements must be capitalized
If you buy a property that needs work before you can rent it out, those repair and improvement costs are capitalized — added to your basis — not deducted as current-year expenses. This is one of the most common mistakes new landlords make.
The rule is strict: any cost incurred before the property is ready to rent and generate income must be capitalized. That includes painting, flooring, appliance replacement, roof repairs, HVAC work, or structural fixes. Once the property is rented and producing income, ongoing repairs are deductible in the year you pay them.
The distinction between a repair (deductible) and an improvement (capitalized) also matters. A repair restores the property to its prior condition; an improvement adds value or extends its life beyond the original. Replacing a broken window is a repair; replacing all windows with energy-efficient ones is an improvement. Your tax preparer should review these costs before you file.
Record-keeping requirements for down payments and basis
The IRS requires you to keep records of your down payment, all closing costs, and any improvements or repairs made to the property. These documents support your depreciation calculation and protect you in an audit.
Gather and organize: the purchase agreement, closing disclosure, title insurance policy, appraisal, survey (if any), receipts for any pre-rental work, and invoices for repairs or improvements made after purchase. Store these for at least three years after you file the return, and longer if you still own the property.
When you sell the property, you will need to calculate your adjusted basis — the original cost plus improvements, minus depreciation taken. If you cannot document what you paid and what you deducted, the IRS can challenge your gain or loss calculation. Keeping records now saves time and money later.
Frequently Asked Questions
Can I deduct my down payment if I use a home equity loan to pay for it?
No. The source of the down payment does not change its tax treatment. Whether you use savings, a home equity loan, or a personal loan, the down payment is still capitalized as part of your property's basis. However, if you took out a home equity loan to fund it, the interest on that loan may be deductible under certain conditions — consult a tax professional about your specific situation.
What if I put down more than 20% — does that change the deduction?
No. A larger down payment does not create a larger deduction. It only reduces the amount you borrow and therefore the interest expense you can deduct annually. Your depreciation deduction is based on the total property cost and the building-to-land split, not on how much you financed.
Do I have to depreciate the property, or can I choose not to?
You must depreciate residential rental property. The IRS requires it, and you cannot opt out to avoid recapture tax when you sell. Even if you do not claim depreciation on your return, the IRS assumes you did and taxes you on it at sale. Claiming it now is always the better choice.
Can I deduct the down payment if the property is a short-term rental or Airbnb?
No. Short-term rentals still follow the same capitalization rules as long-term rentals. The down payment is part of basis and recovered through depreciation over 27.5 years. The frequency or type of rental does not change this.
What happens to my down payment deduction if I refinance?
Refinancing does not create a new deduction. Your down payment remains part of your original basis and continues to be depreciated over 27.5 years. Any new points or fees paid in the refinance are capitalized and amortized over the new loan term.