When using punch recording (Both in manual or auto punch) it is adding a fade to the clip preceding the punch. Why? How do I make it not do that? This renders punch recording basically useless.

No, it doesn't add a fade in or out. It comes on and goes off at the input levels you preset and makes no assumptions that you want a fade in or out.
 
The best way to use auto-punch to fix something IN an existing clip (wrong note played on instrument..etc) is to split the bad section into a new clip with split before and after the mistake..... then HIGHLIGHT the clip to be replaces and activate the auto-punch and let it place it's punch in/out points automatically on the highlighted clip. Then, and only then, delete the highlighted clip and proceed with the punch in recording.
 
Using this method ^^^^ there are no clicks and no pops on the punch points. No need to do any cross fades to make it work.... as long as the levels are the same, it is a seamless, perfect punch that sounds like it was recorded that way to start. I use this method all the time in my guitar solo's and have punched in and out on held and sustained notes.
 
Of course on vocals, where there is room between the phrasing, just set the points and go with it.

Is "Auto Crossfade" enabled in the Options track view menu?

scook
Is "Auto Crossfade" enabled in the Options track view menu?

Yes, definitely check this setting. I think there might be an option in the Preferences menu too.

I've tried it with auto crossfade both on and off and it still adds a fadeout only to the clip preceding the punch. This fade starts at the very beginning of the preceding clip and is linear to the end of that clip.

Can you try duplicating this in a new project? Maybe the current project is starting to go wonky. Maybe take a look in the Punch Record section of the Preferences menu too. I forget if there are any special settings in there but it's worth a look. Good luck.

It, absolutely adds a visual, linear fade, which, of course is audible, also.