I paid 200k cash to close a 2005 sale quickly and secure the sales price - knowing I can always get a loan on the property after the fact. I got a 160k loan on the property in 2006 because I didn't want to have all of my cash tied up and did not reuse any of the 160k from the proceeds of the loan in the rental property. I have been taking the mortgage interest as an expense since 2006 on my schedule E.

Because I didn't originally purchase the property using a mortgage and the 2006 loan proceeds were not used for rental purposes, someone is saying I am unable to deduct the associated mortgage interest? That doesn't seem right. Is that correct?