Hmmm . . . I'm reading the tracing rules in the TaxBook, page 4-14, and other than the need to allocate the use of the interest, I don't see any reason why he cannot deduct the interest on Schedule E, as long as he used it for the rental. Had the Cx used the monies towards his primary home, it would be deductible on Schedule A. My understanding is that Sched A deductions must be secured by the home and used for the home, but w/regard to Sched E, I'm not sure why s/o who for example took out a cash or credit card loan and used it towards the rental could not deduct the interest on Sched E. This seems kind of like that. Businesses can take out all kinds of loans and write off the interest as long as the expense is for the business.
Here's what TaxBook says, as of 3/11/23.
Interest Tracing Rules (Allocation of Interest)The rules for deducting interest vary depending on whether the loan proceeds are used for business, personal, or investment activities. If loan proceeds are used for more than one type of expense, the interest must be allocated based on the use of the loan’s proceeds.Interest tracing rules do not apply to pre-October 14, 1987, home mortgage interest, which is deductible regardless of how loan proceeds are used. See Home Mortgage Interest, page 4-10, and Elec-tion to Treat Mortgage Interest as Not Secured by the Home, page 4-11.Interest categories. Allocate interest expense to the following categories.
•Nonpassive trade or business activity interest.
•Passive trade or business activity interest.
•Investment interest.
•Portfolio interest.
•Personal interest
