Points are prepaid interest
Points (loan origination fees expressed as a percentage of the loan) are treated as prepaid interest. On your personal home purchase you can often deduct them in full the year you pay them. On a rental, you generally must amortize them over the life of the loan instead.
How the deduction works
Divide the total points by the number of months in the loan term and deduct that amount each year as an interest expense on Schedule E. On a 30-year loan, points are spread across 360 months — a small annual deduction, but it adds up.
What happens if you refinance or sell
If you pay off or refinance the loan early, you can generally deduct the remaining unamortized points in that year. Keep track of the balance so you do not lose the deduction when the loan ends.
Frequently asked questions
Can I deduct rental points all at once?
Usually no. Unlike a primary residence, points on a rental are amortized over the life of the loan.
Where do I deduct them?
As part of interest expense on Schedule E, one slice per year.
What if I refinance early?
You can generally deduct the remaining unamortized points in the year the old loan is paid off.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.