Yes, you can deduct the interest on your sch E. Be very careful and be sure you have the paperwork that matches what you described.
Page 7 of Instructions for Schedule E line 12 states: Specific tracing rules apply for allocating debt proceeds and repayment. This is governed by Publication 535, Business Expenses which basically says to be able to prove the money trail.
The IRS is used to seeing a form 1098 with the rental property address and mortgage interest. If they ask, you need to be able to prove the money was used for the purchase of the rental. Obviously, you are not claiming it on your personal residence so you are not double dipping.
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