the money didn't directly go into our down payment,
Unfortunately, that doesn't count, since you closed on the primary residence before you closed on the rental property refi.
we paid for a bunch of upgrades, which are still ongoing into 2021,
Some (not all) of those count for this.
ripping out carpets and refinishing the floor, fixing some minor electrical issues, replacing broken windows, etc.
Only those I included above, I know for a fact, count. Only those items that you actually paid for in tax year 2020 can be included on your 2020 tax return.
We will likely also redo the shed.
We might also want to upgrade our electrical panel and install new heating and cooling.
That will count also. But not on your 2020 tax return since you didn't pay for it in 2020.
One thing that is important with this, is that you must be able to "track the flow" of the money. So keep that money in the bank until it's time to use it for a "qualified" expense. Don't go spending it on something else, as that will "break" the flow and could disqualify the claim
Note also that all this money you spend for qualified upgrades, also increases the cost basis of your primary residence. So keep track of your actual costs. They will come into play and be benificial to you on the tax front, when/if you sell your primary residence in the future. (Or even if you convert it to a rental in the future.)
As an example:
Lets say you spent 20% of the total refi amount for refinishing the the floor, electrical issues and window replacements and paid for them in 2020. You can claim 20% of the interest on the loan as a SCH A itemized deduction on your 2020 tax return as well as on all future tax returns for the life of "that" loan.
Now lets say in 2021 (this year) you spend another 15% on a new HVAC and redoing the shed. On your 2021 return you can deduct 35% of the mortgage interest paid on the return, and you can do so for all future returns for the life of the loan.
Now for a note on this. As I'm sure you're aware, your SCH A itemized deductions make no difference to your tax liability until those itemized deductions exceed your standard deduction. For tax year 2020 the standard deduction for a married couple filing joint is $24,800. So it takes one heck of a lot of itemized deductions to exceed your standard. But claim what you can on SCH A anyway. Two reasons for this.
1) It "might" make a difference on your state tax return if you're required to file one, as states have their own "standard deduction/itemized deduction" rules and dollar amount limits and thresholds.
2) If you have something such as a costly unforseen and costly medical emergency, (medical expenses are SCH A itemized) that medical expense, combined with your other SCH A deductions just might put you "over the top" and your itemized deductions could reduce your tax liability quite substantially on the federal return in that tax year.
