Amortizing loan fees on rental property

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: Points and other costs of getting a rental property loan are not deducted in the year paid. Points are prepaid interest and loan fees are capital costs; both are generally spread over the life of the loan. When the loan ends early through a sale or a refinance with a different lender, you deduct the remaining balance that year. Purchase closing costs, by contrast, go into the property’s basis.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Your tenant pays the mortgage; the IRS pays for the roof (eventually, over 27.5 years). The IRS pays for the loan fees too, eventually, over 30 years. Closing costs on a rental loan are one of the most commonly mishandled items on Schedule E: either expensed all at once, or added to the building basis, or forgotten.

IRS Publication 527 says that certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest, and that these expenses, which include mortgage commissions, abstract fees and recording fees, are capital expenses that are part of your basis in the property. In practice, the IRS and most preparers spread loan costs over the term of the loan, as Publication 535 explained for business loans.

CPA Warning Label: A 30-year loan fee you forget to amortize is a deduction you lose a little of every year. One spreadsheet line fixes it.

Which fees amortize

Sort your closing disclosure into three groups:

1. Loan costs (amortize over the loan term)

• points, loan origination fees and discount points (prepaid interest);
• lender's underwriting, processing and application fees;
• mortgage broker fees;
• appraisal required by the lender;
• lender's title insurance policy;
• recording fees for the mortgage itself;
• credit report fees.

2. Purchase costs (add to the property's basis)

Per Publication 551 and Publication 527: abstract fees, charges for installing utilities, legal fees for the purchase, recording fees for the deed, surveys, transfer taxes, owner's title insurance, and amounts the seller owed that you agreed to pay. These are allocated between land and building and depreciated with the building.

3. Deductible now

• prorated property taxes for the period after you own it (as taxes);
• interest from closing to the first payment (as interest);
• prorated insurance premiums for the current year.

Escrow deposits for future taxes and insurance are not deductible until paid out.

Seller-paid points and credits

Seller-paid points and lender credits change the math. A lender credit that offsets closing costs reduces the loan costs you amortize. Points paid by the seller on a rental purchase are generally treated as a reduction of the purchase price, lowering basis, rather than as your interest deduction; the home-purchase rule that lets buyers deduct seller-paid points applies to a main home. Read the closing disclosure carefully: the "paid by seller" column matters.

Recurring loan charges

Some costs are not one-time loan fees:

• Annual servicing or account fees on a line of credit are generally deductible as they are paid.
• Mortgage insurance premiums on a rental loan are an ordinary rental expense, generally deductible on Schedule E as insurance or other expense for the period they cover. Upfront mortgage insurance covering many years may need to be spread out.
• Late fees charged as compensation for the use of money can be interest; flat service charges are generally a rental expense.
• Loan modification fees on an existing loan are generally amortized over the remaining term of the modified loan.

Points: interest, but not deducted at once

Points on a rental loan are prepaid interest. Publication 527 says you generally cannot deduct the full amount in the year paid; you deduct them ratably over the term of the loan, using the original issue discount rules (Publication 527 and the now-retired Publication 535 describe the de minimis rule and the constant-yield method).

Schedule

The usual method for a small loan is straight-line monthly amortization:

1. Add the loan costs and points.
2. Divide by the number of months in the loan term.
3. Deduct the monthly amount times the months the loan was outstanding during the year.

Publication 527 explains the de minimis OID rule: if the OID (here, the points) is less than one-fourth of 1% of the stated redemption price at maturity times the number of full years to maturity, you can use straight-line amortization. Larger point amounts generally use the constant-yield method, which front-loads deductions slightly. Many preparers use straight-line for small loan fees.

Points go on Schedule E with interest (line 12 or 13); amortization of other loan fees is figured on Form 4562 Part VI and is commonly reported on Schedule E line 18 with depreciation or on line 19 as an "other" expense; preparers differ, so pick one and stay consistent. Keep a schedule for each loan with the start date, total and monthly amount.

Payoff writes off remaining

Publication 527 says that if a loan ends early, because you pay it off, sell the property or refinance with a different lender, you can deduct any remaining unamortized balance in that year.

• Sale of the property: the remaining loan fees are deducted in the year of sale, not added to basis.
• Paying off the loan early: deduct the balance when paid off.
• Prepayment penalty: generally deductible as interest in the year paid, if it is charged for paying the loan early.

Partial payoffs and recasts

Paying down principal early, without ending the loan, does not trigger a write-off; the schedule continues. A recast with the same lender generally keeps the existing schedule. A loan assumed by a buyer when you sell ends your obligation, so your remaining costs are deducted.

This is easy to forget, because the payoff happens at a closing focused on the sale. Check your amortization schedule whenever a loan ends.

Refinance overlap

Refinancing creates two schedules at once:

• Different lender: deduct the remaining fees and points from the old loan in the year of refinance. Start a new schedule for the new loan's costs.
• Same lender: Publication 527 says that if you refinance with the same lender, you generally deduct the remaining points over the term of the new loan rather than all at once. Confirm treatment of non-point fees with your preparer.
• Cash-out portion: costs of the new loan follow the use of the funds. If 20% of the new loan funded a personal purchase, 20% of the loan costs are personal and not deductible on Schedule E. See rental mortgage interest.
• Multiple refinances: each loan has its own schedule. When a refinanced loan is itself refinanced, its remaining balance gets the same treatment.

Lines of credit and HELOCs

A home equity line or business line used for a rental has its own costs. Setup fees are generally spread over the draw period or the term of the agreement. If the line is used partly for rental and partly for personal purposes, only the rental share of the fees and interest is a rental expense under the tracing rules.

Refinance costs on a loan used to build or substantially improve the property may need to be capitalized into the improvement under section 263A during construction. Discuss with a preparer.

Example

Illustration: Fran buys a rental on April 1, 2026 with a $300,000 30-year loan. Her closing disclosure shows: 1 point ($3,000), origination fee $1,200, appraisal $600, lender's title policy $900, mortgage recording $150, credit report $50. Purchase costs: owner's title $1,100, deed recording $100, transfer tax $1,500, survey $400. Prorated taxes $1,800 for April to December.

• Loan costs: $3,000 points plus $2,900 other fees = $5,900 over 360 months = about $16.39 a month. For April through December 2026 (9 months): about $147.
• Basis: $3,100 of purchase costs added to the property and allocated between land and building.
• Deductible: prorated taxes of $1,800, plus interest paid.

June 2031 refinance with a new lender: 62 months amortized, about $1,016 deducted in total. Remaining: $5,900 minus $1,016 = about $4,884, deducted in 2031. New loan costs start a new schedule.

What goes wrong without the schedule: expensing $5,900 in 2026 overstates that year's deduction; forgetting the $4,884 in 2031 loses it for good, unless you amend in time. Adding loan costs to the building's basis spreads them over 27.5 years instead of the loan term and misses the payoff write-off. See real estate depreciation.