It's 7k/month rent and the renters are both 1. totally incapable of living a life with typical home issues (occasional bug in the house, weird smell here or there) and 2.

Technical difficulties for day 2?

Got really technical, but I think it highlighted why I should stay away from using cap gains deferral as a core selling point. 

Would repairs support demand for rent at increased - considering you already have issues with rent payments on time?

Liability issues? 

in NYC some owners are known to rent out their semi basement which is on a grey side. so during inspection would that cause any issue?

As you noted in your original post if the loan was signed on or before June of 2016, there is no issue. 

Personally, as a matter of practicality, since they are allowable expenses I THINK the only issue the irs could take is just that its reported wrong, and you'd just apply it the way they want.

I really would like to know if you have ever had to litigate the issue or know of a case, you're relying on for your understanding of how the law would be applied?

So there are two issues here.