The interest tracing rules apply to the investment property, not the personal residence. Here, the taxpayer is using a mortgage on investment property to purchase a personal residence. The interest tracing rules would determine how much of the interest is deductible as an investment expense on schedule E. The ability to deduct mortgage interest on a personal residence on schedule A is determined by a different section of the regulations, and those regulations are very clear that the mortgage must be secured by the residence. If I borrow money to buy, build, or improve my home through a personal loan or credit cards or a loan from my 401(k), that interest is never tax deductible home mortgage interest because the loan is not secured by the residence, even if it is fully traceable.
