You cannot deduct the down payment itself, but you can deduct the loan interest and other costs tied to buying the property
The down payment on a rental property is not tax-deductible. You are buying an asset, not paying an expense. The IRS treats your down payment as part of your cost basis — the total amount you paid to acquire the property — which you recover later through depreciation deductions spread across 27.5 years (for residential rentals) or 39 years (for commercial buildings).
What you can deduct are the costs that come alongside the down payment: the loan origination fees, appraisal costs, title insurance, property inspection, and attorney fees paid to close the purchase. You can also deduct points paid to lower your interest rate. These closing costs reduce your taxable income in the year you pay them, or you can add them to your cost basis and depreciate them over time — your tax situation determines which route makes sense.
The mortgage interest itself becomes deductible once you own the property and start collecting rent. This is one of the largest deductions rental property owners receive, and it applies to the full loan amount, not just the portion above your down payment.
Key Takeaways
- Down payment money is treated as part of what you paid for the property, not as a deductible expense, so you cannot write it off in the year you buy.
- Closing costs like appraisal fees, title insurance, loan origination fees, and attorney fees can be deducted or added to your cost basis depending on your tax situation.
- Mortgage interest on the loan becomes fully deductible once the property is in service as a rental, and this applies to the entire loan balance.
- Depreciation allows you to deduct a portion of the building's value each year for 27.5 years (residential) or 39 years (commercial), which is how you eventually recover your down payment through tax deductions.
How depreciation recovers your down payment over time
Depreciation is the mechanism that turns your down payment into tax deductions. The IRS assumes buildings wear out and lose value, so it lets you deduct a portion of the building's cost each year. You cannot depreciate the land itself — only the structure and improvements.
For a residential rental property, you divide the building's value by 27.5 and deduct that amount each year for 27.5 years. If the building portion of your purchase is worth $300,000, you deduct roughly $10,909 per year. This deduction applies whether you paid cash or financed the purchase, and whether you put down 20% or 50%. The down payment is part of your total cost, and depreciation spreads that cost across the holding period.
When you sell the property, the IRS recaptures the depreciation you claimed — meaning you pay tax on those deductions at a rate of 25% (the "unrecaptured Section 1250 gain" rate), even if you sold at a loss. This is why depreciation is powerful during ownership but has a cost at the end.
Closing costs you can deduct or capitalize
Not all costs paid at closing are treated the same way. Some can be deducted when ready; others must be added to your cost basis and depreciated or recovered when you sell.
| Cost Type | Treatment |
|---|---|
| Loan origination fees (points) | Deduct over the life of the loan, or add to basis |
| Appraisal fee | Add to cost basis |
| Title insurance | Add to cost basis |
| Property inspection | Add to cost basis |
| Attorney or escrow fees | Add to cost basis |
| Recording fees | Add to cost basis |
| Property survey | Add to cost basis |
| Repairs made before rental use begins | Add to cost basis or depreciate |
The distinction matters because adding a cost to your basis increases the amount you depreciate, which spreads the deduction across decades. Deducting it when ready gives you the tax benefit in year one. Your accountant or tax professional can advise which approach reduces your tax liability based on your income and other deductions.
Mortgage interest is fully deductible once the property is rented
Once you own the rental property and it generates income, all of the mortgage interest you pay becomes deductible. This applies to the entire loan balance, not just the portion above your down payment. If you borrowed $400,000 and put down $100,000, you deduct interest on the full $400,000.
Interest paid during the construction or renovation period before the property is ready to rent may not be deductible in the year paid — it might need to be capitalized and added to your cost basis instead. Once the property is in service and producing rental income, interest becomes a current-year deduction.
This is one of the largest deductions available to rental property owners. In the early years of a mortgage, when most of your payment goes to interest, this deduction can offset a significant portion of your rental income.
Other rental property deductions that reduce your taxable income
Beyond the down payment and mortgage interest, you can deduct ongoing costs of owning and operating the rental:
- Property management fees and leasing agent commissions
- Repairs and maintenance (not improvements that extend the property's life)
- Property taxes
- Insurance premiums
- Utilities you pay (if the lease does not pass them to the tenant)
- Advertising for tenants
- Legal and accounting fees related to the rental
- HOA fees
- Depreciation on appliances, furniture, and other personal property (separate from the building)
These deductions are taken in the year you pay them, and they reduce your rental income dollar-for-dollar. If your rental income is $24,000 per year and your deductible expenses total $18,000, your taxable rental income is $6,000.
Capital improvements versus repairs — the distinction matters
A repair fixes something that is broken or worn. A capital improvement adds value, prolongs the property's life, or adapts it to a new use. This distinction determines whether you can deduct the cost when ready or must depreciate it over time.
Replacing a broken window is a repair — deductible in the year paid. Replacing all the windows in the building is an improvement — you depreciate it. Patching a roof is a repair. A new roof is an improvement. Painting interior walls is a repair. Replacing the HVAC system is an improvement.
The IRS has specific rules for this, and the line is not always clear. If you spend money before the property is rented out, those costs are typically capitalized (added to your basis) rather than deducted. Once the property is in service, repairs are deductible and improvements are depreciated. Your tax professional can help you categorize expenses correctly, because misclassifying them can trigger an audit.
Frequently Asked Questions
Can I deduct the down payment in the year I buy the property?
No. The down payment is part of your purchase price, not an expense. You recover it through depreciation over 27.5 years (residential) or 39 years (commercial), or when you sell the property. Closing costs tied to the purchase may be deductible or added to your basis, depending on the type of cost.
What if I paid cash for the rental property instead of financing it?
You still cannot deduct the cash payment. However, you can depreciate the building's value over 27.5 or 39 years, just as you would with a financed purchase. You lose the mortgage interest deduction, which is a significant tax benefit of financing.
Do I have to depreciate the property, or can I choose not to?
You must depreciate residential rental property. Even if you do not claim the depreciation deduction on your tax return, the IRS assumes you did and will recapture it when you sell. It is better to claim it and reduce your current taxable income.
Can I deduct points paid to lower my mortgage interest rate?
Yes, but the method depends on the loan type. For rental property mortgages, you typically deduct points over the life of the loan rather than all at once. Your lender will tell you the loan term, and you divide the points cost by that number to find your annual deduction.
What happens to my down payment when I sell the rental property?
Your down payment is recovered as part of your sale proceeds. If you sell for more than your total cost basis (down payment plus closing costs), you owe capital gains tax on the profit. The depreciation you claimed is recaptured at 25%, even if you sold at a loss overall.