Nikola purchased a rental house for $80,000 with land value of $15,000. Before making the house available for rent, Nikola remodeled the bathroom. She installed a new vanity, fixtures, and flooring at a cost of $3,000. She also painted the existing walls and repaired the linen closet door at a cost of $550. How are these expenses reported? 1. $3,000 is capitalized and recovered through depreciation over 27 1/2 years, while $550 is deducted as a repair on Schedule E, line 14. 2. $3,550 is added to the basis of the property and recovered through depreciation over 27 1/2 years. 3. $3,550 is reported as an investment interest deduction on Schedule A. 4. $3,550 is deducted as an expense on Schedule E, line 14