you do not have to report information on a refinance, you are correct that you deduct the interest- do not change the 1098 for the entry.
My interpretation of the above statement is contradictory, based on my interpretation of the question. So let's clarify things a bit here, to help ensure accuracy and understanding by all parties on all fronts.
I refinanced my rental property and took a cash out that is approximately equal to my outstanding loan balance.
My interpretation of the above is understood to be as I've reworded the question below.
I refinanced my rental property for approximately double what I owe on it.
If my interpretation is correct, then at this point in this post, you can only deduct on the SCH E that percentage of mortgage interest that is equal to the percentage of the amount refinanced, that was used to pay off the first loan. Example:
Refinanced on 7/1/2020 for a total loan amount of $100,000.
$50,000 of that $100,000 was used to pay off the original loan.
I have $50,000 cash left, that I can do anything I want to with.
With the above example, I can only deduct 50% of the mortgage interest on the refi loan, for the entire life of that loan. The other 50% of mortgage interest is just flat out not deductible. Period.
Now, there are things that "could" allow you to deduct more than 50% of that interest. For example, if you used $25,000 of the cash out money to put a new roof on the rental property, that's a property improvement. So that means you now have a total of $75,000 invested into the property. That's 75% of the refi loan. Therefore, you can claim a maximum of 75% of the interest on that loan every single year, for the life of the loan. This is but one example of many possibilities that would allow you to deduct a higher percentage of the mortgage interest on the SCH E. It's also possible that if you use any of that cash to improve your primary residence, then a corresponding percentage of that interest could be claimed as a SCH A itemized deduction.
