For cash out of property certain rules apply on how the proceeds are used. So the question here is whether the delayed financing is classified as a mortgage upon purchase, in which case you can deduct on schedule E as you suggest from the property upon which the dealyed financing is performed. Or if it is classified as cash out then the mortgage interest is deductible if the money is reinvested in new rental property, and it is deductible agains the rent of the newly acquired rental property with the proceeds. This is just some thoughts on the subject, not an answer. If someone knows more, I would appreciate input.
