I think you are reading sec 163 too broadly. I believe this would be investment interest under 163(d).
I think you are reading sec 163 too narrowly and this would NOT be investment interest under 163(d).......read the definition of investment interest in that section. If that's eliminated there is nothing left to disqualify the interest as a deduction under the General Rule of sec 163. Don't forget that income from rental property is always treated as business income not subject to self employment tax IF the owner materially participates in the activity and I don't think you have to use any tracing rules because it's the property that is producing the income that's being encumbered......it's different from personal residential mortgages.
