CAG/CTG repeats are structure-forming repetitive DNA sequences, and expansion beyond a threshold of ∼35 CAG repeats is the cause of several human diseases. Expanded CAG repeats are prone to breakage, and repair of the breaks can cause repeat contractions and expansions. In this study, we found that cotranscriptional R-loops formed at a CAG-70 repeat inserted into a yeast chromosome. R-loops were further elevated upon deletion of yeast RNaseH genes and caused repeat fragility. A significant increase in CAG repeat contractions was also observed, consistent with previous human cell studies. Deletion of yeast cytosine deaminase Fcy1 significantly decreased the rate of CAG repeat fragility and contractions in the rnh1Δrnh201Δ background, indicating that Fcy1-mediated deamination is one cause of breakage and contractions in the presence of R-loops. Furthermore, base excision repair (BER) is responsible for causing CAG repeat contractions downstream of Fcy1, but not fragility. The Rad1/XPF and Rad2/XPG nucleases were also important in protecting against contractions, but through BER rather than nucleotide excision repair. Surprisingly, the MutLγ (Mlh1/Mlh3) endonuclease caused R-loop–dependent CAG fragility, defining an alternative function for this complex. These findings provide evidence that breakage at expanded CAG repeats occurs due to R-loop formation and reveal two mechanisms for CAG repeat instability: one mediated by cytosine deamination of DNA engaged in R-loops and the other by MutLγ cleavage. Since disease-causing CAG repeats occur in transcribed regions, our results suggest that R-loop–mediated fragility is a mechanism that could cause DNA damage and repeat-length changes in human cells.