Actually, I see I got some numbers wrong in my earlier post. I realize now your current loan on the property that you took out in 2020 is $620K.
So the $380K was made up of his half owed to the bank $240K + $120K as profit to him
Actually, what the seller does with the money you pay them is not "your" concern, when it comes to taxes. The fact that he used a portion of the $380K you paid them for their half, to pay off their share of the original loan, has no bearing on "your" taxes. Your concern is that of the current loan.
When you refinanced, you refinance "your" outstanding balance on the loan, which was $240K That $240K is 38.7% of the new current loan. The remaining $380K is what you paid for the rental unit. So that's the cost basis on that rental unit. The 380K you paid for that rental unit is 61.3% of the borrowed amount of $620K. Therefore you deduct 61.3% of the mortgage interest paid on that loan on the SCH E, for the life of that loan. The remaining 38.7% of the mortgage interest paid each year, is a SCH A itemized deduction.
