Since this was purchased as an investment to fix and resell, you add the carrying costs including mortgage interest from 2016 on, property taxes and rehab expenses to the basis of the property. When you sell it, all of these costs (and others from the purchase) become part of the adjusted basis for determining gain or loss on the property. Property taxes are added to the basis and are not deductible on Schedule A since they are considered a business expense, not a personal one, because of the status as an investment property.
When you sell, you will report the sale under the investment section. Until the property is sold, you do not report any expenses from the purchase or updates you have completed.
The person who loaned you the money will report his interest income in the year received.
Please feel free to post any additional details or questions in the comment section.
