No, you cannot write off a down payment on rental property. The IRS treats the money you put down as part of the property’s purchase cost, not as an expense, so it gets added to your tax basis and recovered gradually through depreciation deductions over 27.5 years rather than deducted in the year you buy. Several other costs from the same closing do produce tax benefits, and understanding which is which is the difference between an accurate first-year return and one that either overstates deductions or leaves money on the table.
Why the Down Payment Isn’t Deductible
The tax code divides money you spend on a rental into two buckets. Capital expenditures buy or improve an asset. Operating expenses keep it running. Only operating expenses produce a deduction in the year you pay them.
A down payment is capital by definition. Whether you write a check for $40,000 or $400,000, the IRS sees it as a slice of the total purchase price. That price, plus certain closing costs, becomes the property’s basis — the ledger figure used to calculate depreciation while you own the property and gain or loss when you sell it.1Internal Revenue Service. Topic No. 703, Basis of Assets
Nothing about that cash disappears from a tax standpoint. It just doesn’t reduce this year’s taxable income.
What Gets Rolled Into Basis
Basis starts with the full purchase price, including the portion your mortgage financed. Your down payment is one component of that number, not a separate figure. Several closing costs get capitalized alongside it under IRS Publication 551:2Internal Revenue Service. Publication 551 – Basis of Assets
- Title insurance (the owner’s policy).
- Legal fees, including title search and preparation of the sales contract and deed.
- Recording fees charged by the local government.
- State or local transfer taxes triggered by the sale.
- Survey fees.
- Utility installation or connection charges.
- Seller-owed costs you agree to pay at closing, such as back taxes, sales commissions, or repair charges.
Publication 527, which covers residential rental property specifically, lists the same items.3Internal Revenue Service. Publication 527 – Residential Rental Property None of these produce a deduction in the year you close. They ride along with the purchase price into basis and come back to you gradually through depreciation.
How You Actually Recover the Cost
Depreciation is the mechanism that turns your locked-up basis into annual deductions. Residential rental property depreciates on a straight-line schedule over 27.5 years under the Modified Accelerated Cost Recovery System.4Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System Same amount each year, no acceleration on the building itself.
Carve Out the Land First
Land doesn’t depreciate. It doesn’t wear out.5Internal Revenue Service. Publication 946 – How To Depreciate Property Most owners split the basis between land and building using the ratio from their local property tax assessment.
Say you buy for $400,000 and your basis after capitalized closing costs is $410,000. If the assessor puts 20% of the value on land, your depreciable basis is $328,000. Dividing by 27.5 gives you about $11,927 per year in depreciation.
You Don’t Get a Full Year in Year One
The IRS uses a mid-month convention: the property is treated as placed in service at the middle of whichever month you closed.5Internal Revenue Service. Publication 946 – How To Depreciate Property Close on June 3, and you get half a month for June plus the rest of the year — 6.5 months of depreciation, not 12. The same rule applies in the year you sell.
Depreciation flows from Form 4562 to Schedule E, where it reduces taxable rental income.3Internal Revenue Service. Publication 527 – Residential Rental Property It’s a paper deduction: no cash leaves your account for it in the year you claim it.
Closing Costs You Can Deduct Now
A few items on the settlement statement do produce current tax benefits, but the rules differ from what applies to a primary residence.
Points
On a personal home, points are often fully deductible in the year you pay them. On a rental, they aren’t. Publication 527 is explicit: because points are prepaid interest, you deduct them over the loan term. Pay $6,000 in points on a 30-year rental mortgage and you deduct $200 a year. If the loan ends early through refinance, payoff, or foreclosure, you can deduct whatever balance remains unamortized in that year.3Internal Revenue Service. Publication 527 – Residential Rental Property
Prorated Property Taxes
Property taxes you cover at closing for the portion of the tax year you own the property go on Schedule E. And unlike taxes on your personal residence, rental property taxes aren’t subject to the $10,000 SALT cap. That cap applies to taxes on non-business property; taxes paid in carrying on a trade or business or an income-producing activity remain fully deductible.6Office of the Law Revision Counsel. 26 USC 164 – Taxes
Ongoing Expenses You Can Deduct Each Year
Once the property is in service, ordinary and necessary operating costs come off rental income on Schedule E. Mortgage interest is usually the largest. Insurance premiums, property taxes, and management fees deduct in the year paid.
Repairs Versus Improvements
Fixing a leaky faucet, repainting a room, replacing a broken window: repair, deducted now. New roof, added bathroom, anything that adds value or extends useful life: improvement, capitalized and depreciated over 27.5 years.3Internal Revenue Service. Publication 527 – Residential Rental Property
Getting this line wrong is one of the most common audit triggers for rental owners. The IRS asks whether the work restored the property to prior condition (repair) or made it meaningfully better, adapted it to a new use, or extended its life (improvement). When the answer isn’t clear, capitalizing is the safer choice.
Travel to the Property
Driving to collect rent, meet a contractor, or inspect the unit is deductible. The 2026 IRS business standard mileage rate is 72.5 cents per mile.7Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile You can use the standard rate or track actual expenses, but if you go with the standard rate on an owned vehicle, you must elect it in the first year the vehicle is available for business use. On a leased vehicle, choosing the standard rate locks you in for the entire lease term.
Why Your Paper Loss May Not Actually Reduce Your Tax Bill
Depreciation combined with interest and other expenses often produces a loss on paper even when the property cash-flows. New owners assume that loss offsets their W-2 income. Usually, it can’t.
The IRS classifies rental real estate as a passive activity by default. Passive losses only offset passive income.8Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited Unused losses carry forward, so nothing is wasted, but they may sit for years waiting for passive income to absorb them.
One escape valve helps most small landlords. If you actively participate — making decisions on tenants, repairs, and lease terms — you can deduct up to $25,000 in rental losses against non-passive income each year. The allowance phases out starting at $100,000 of adjusted gross income and disappears at $150,000. Married filing separately drops the ceiling to $12,500 with a phase-out beginning at $50,000.8Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited The active participation standard is low: own at least 10% and make meaningful management decisions, even with a property manager doing the daily work. Limited partners in a limited partnership generally don’t qualify.
The Down Payment Comes Back at Sale
Because the down payment lives in basis, it eventually reduces the taxable gain when you sell. But there’s a wrinkle worth knowing before you buy.
Every dollar of depreciation you claimed — or should have claimed, even if you forgot — reduces your basis. When you sell, the portion of your gain attributable to depreciation is taxed at a maximum federal rate of 25% as depreciation recapture, separate from any long-term capital gains tax on the rest of the profit.
Say you bought for $400,000, claimed $80,000 in depreciation (reducing basis to $320,000), and sold for $500,000. The $180,000 gain splits: $80,000 is recapture taxed at up to 25%, and the remaining $100,000 is taxed at your long-term capital gains rate. The 3.8% net investment income tax may apply on top if your income exceeds the threshold.
You can defer both the recapture and the capital gain by rolling into another qualifying rental or investment property through a Section 1031 exchange.9Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment The timing rules are strict: 45 days from sale to identify replacement properties in writing, 180 days to close.10Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031 The tax doesn’t vanish; it rides into the replacement property’s basis. Investors chain exchanges for decades, and if the final property is held until death, heirs receive a stepped-up basis that can erase the accumulated deferred gain entirely.