How to deduct and book points paid on a rental property loan
Points on a rental property loan generally are not deductible all at once. IRS Publication 527 says you generally deduct them over the term of the loan, using the original issue discount rules. If the loan ends early through a payoff or refinance, you may be able to deduct what is left that year. Book the points as a prepaid asset, not as an expense on closing day.
What the IRS rule says
IRS Publication 527 says that if you pay points to get a loan on rental property, you generally cannot deduct the full amount in the year paid. You deduct the interest over the term of the loan. The yearly amount follows the original issue discount rules, which treat points as part of the cost of borrowing.
A different group of costs is not interest at all. The publication says charges such as mortgage commissions, abstract fees and recording fees paid to obtain a mortgage cannot be deducted as interest. They are capital expenses that become part of your basis in the property.
Sort the closing disclosure into three piles
Open the closing disclosure for the loan and mark each charge.
| Charge | Typical treatment in your books | Why |
|---|---|---|
| Discount points or origination points | Prepaid loan cost, then expense over the loan | Publication 527: deduct over the loan term |
| Mortgage commission, abstract, recording fee | Add to the property cost basis | Publication 527: capital expenses |
| Interest from closing day to month end | Mortgage interest expense | It is ordinary interest |
Some charges are hard to classify, such as a lender's document fee. Put anything unclear in a holding account and let your preparer decide at year end, so nothing is deducted too early.
The entries
Example a made-up LLC pays $3,000 in points on a new 30 year loan in a month with 360 payments ahead. Debit Prepaid loan costs $3,000 and credit the bank $3,000 at closing. A simple straight line split is $3,000 divided by 360, which is $8.33 a month or about $100 a year. Each month debit Loan cost expense $8.33 and credit Prepaid loan costs $8.33. After one full year the prepaid balance is $2,900.
The IRS method for figuring the yearly amount (the constant yield method in Publication 527) can give a slightly different number from straight division, because it weights the early years with the loan balance. Treat the straight line figure as a placeholder, then true it up with your preparer's number at year end.
When the loan ends before the term
Publication 527 says that if the loan or mortgage ends, you may be able to deduct any remaining points in the year it ends. That can happen through a refinance, a prepayment, a foreclosure or a similar event. There is one exception: when you refinance with the same lender, the remaining points generally are not deductible in the year of the refinance, but may be deductible over the term of the new loan.
Example continuing the $3,000 above, suppose the LLC sells the building after 5 years with 25 years of the term left, and the prepaid balance is $3,000 minus 5 times $100, which is $2,500. If the loan is paid off with a new lender or at the sale, the $2,500 remaining balance is the amount to raise with your preparer for deduction in the payoff year. With a refinance at the same lender, it would instead carry into the new loan's schedule.
Either way, the payoff entry should clear the old prepaid account to zero, so you can see nothing is left behind. A longer walk through of the payoff and new loan entries is in recording a refinance.
How DoorKeeping handles it
DoorKeeping's books record rental income and expenses, not loan balances or amortization, so the treatment of points and other loan costs stays with your preparer. Ask Claude or ChatGPT to read your closing disclosure and list the points, basis items and interest, then hand that list to your preparer. DoorKeeping does not give tax advice, so confirm the treatment of each charge with your preparer.
Sources
- IRS, Publication 527, Residential Rental Property (2025), read Oct 30, 2026
Questions
- Can I deduct all my points on a rental loan in the first year?
- Generally not. Publication 527 says you generally deduct points over the term of the loan, following the original issue discount rules.
- What happens to unused points if I pay off the loan?
- Publication 527 says you may be able to deduct the remaining points in the year the loan ends. A refinance with the same lender is the exception.
- Are recording fees and abstract fees points?
- No. Publication 527 says expenses such as mortgage commissions, abstract fees and recording fees paid to obtain a mortgage are capital expenses that go into your basis.