I am in California in the United States. I stated renting my house out this year (2017). I originally purchased the home with my ex-wife in 2001, but bought her interest in the property as part of our divorce settlement in 2013.
To pay her off, I refinanced the house for more than the previous balance. I know in Pub 598 for rental expense you can deduct the interest on the loan for the rental property, but if you refinance the rental property for more than the previous balance the "loan proceeds not related to rental use generally cannot be deducted".
Is the payoff I gave her part of "rental use"? So if my previous balance on the loan was $180, and I refinanced for $320, and I have my wife $117 for her interest in the home, could I still claim the interest I am paying on $297K of the new $320K loan because the proceeds I paid to her are really part of the rental use?