There have been several discussions of this recently and I think the final consensus is this:
If part of the loan would still be for acquisition debt on your personal residence and you want to deduct a portion of the interest on schedule A, then you can't deduct the other part of the interest as an investment expense. Remember that your home mortgage is only deductible to the extent the money is used to buy build or substantially improve your home. Any other debt is equity debt and the interest on equity debt is not deductible as mortgage interest on schedule A. Suppose you have an original purchase mortgage with a remaining balance of $50,000, that is acquisition debt. If you did a cash out refinance for $150,000, then your acquisition debt is still only $50,000 and only 33% of the interest is deductible on schedule A as personal mortgage interest, (unless you used part of the money to substantially improve your home of course).
To deduct the interest as mortgage interest on the investment property, you have to make an election to treat the loan which is secured by your personal home as not secured by the home. (You just make the election in your own mind, you don't have to file paperwork, but once made, the election can't be changed back.). Then you also have to be able to apply the tracing rules to allocate the interest properly to the investment property. You need a paper trail that shows that the interest is directly tied to the investment property. It's simple enough if you refinance and use the cash for the investment property, but becomes more complicated and harder to prove if you also take cash out for vacations, cars, and other personal expenses. It becomes harder and harder to allocate a particular dollar of interest to the investment property.
So in my above example, if you refinanced a $50,000 purchase mortgage into $150,000 and used the $100,000 for your investment, you could deduct either 1/3 the interest on schedule A as a home mortgage, or 2/3 the interest as an investment expense, but not both.
