The idea that only interest expense that is secured by the rental real estate can be deductible in a rental business is simply incorrect. There are specific tracing rules under Treasury Regulation § 1.163-8T that provide guidance for allocating interest based on how loan proceeds are used. Having said that, there are addition restrictions on the deductibility of 401k loan interest, I believe that kick in when borrowing against elective deferrals. That is the cite I was looking for, but I'll find it myself when I'm at a computer.
