If you had to borrow money from a qualified lender to do what you are referring to as "repairs" to a rental property, that indicates to me that you needed to borrow a significant amount of money. So I question if the work done was actually repairs, or if they were property improvements. There is a distinct difference between repairs and property improvements.
For the interest to be deductible on SCH E, at least one of two things must be true.
- The loan is a secured loan and the money was used (every penny of it) for the rental property.
- If the loan is unsecured, or secured by other than the rental property itself, then all of the borrowed money (every penny of it) was used for the work done on the rental property.
For a secured loan, you will receive a 1098-Mortgage Interest Statement from the lender which you will enter on the SCH E in the program where is specifically asks for 1098 information.
If an unsecured loan you'll claim the interest paid one screen after the 1098 data entry screen where it asks for "other interest paid". You must also select the option for "I paid more mortgage interest than is shown on my 1098". That will put the "other interest paid" on line 13 of the SCH E. Make sure you have a paper trail to prove yourself, if audited by the IRS on this, if the loan is unsecured by the rental property.
Now for how you will treat the cost of what you call "repairs". Again, it may not be repairs at all, but property improvements. In such a case you have to capitalize and depreciate the costs over time. Below are the "plain english" definitions so you can be clear on what is a repair expense, and what is a property improvement.
- RENTAL POPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED
Property Improvement.
Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.
To be classified as a property improvement, two criteria must be met:
1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.
2) The improvement must add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.
Cleaning & Maintenance
Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.
Repair
Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.
Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.
However, when you do something like convert the garage into a 3rd bedroom for example, making a 2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.
