Is interest on a loan used to renovate a rental property currently deductible or added to its cost?

Interest on a loan used to finance a rental property renovation is generally a current expense, deductible in the year it's paid or payable, even if the renovation itself is treated as a capital expense. This is an important distinction that often gets confused: interest deductibility follows the use of the borrowed funds, not whether the thing the money was spent on happens to be capital or current in nature.

In other words, these are two separate questions that shouldn't be conflated. Whether the renovation itself is a current repair or a capital improvement is analyzed under the usual repair-versus-improvement test, addressed in related questions. Separately, and regardless of the answer to that question, the interest on money borrowed specifically to pay for the renovation is typically deductible as a current expense against your rental income for the year, because the borrowed funds are being used for an income-earning purpose. So you can have a fully capitalized renovation cost, added to the property and depreciated over time, sitting alongside interest on the loan that funded it being fully deducted right away in the year paid - both things can be true at once without contradiction.