You got me thinking and I believe I owe an apology to @Sri16. I have a new understanding that I hope the experts will agree with.
I think it is reasonable to interpret 'expenses incurred' under Special Situations #2 as expenses that were paid out of pocket before taking out the mortgage. You basically have a 24 month window the span of which depends when the debt is assumed. If the debt is assumed before work is completed, the debt covers expenses already paid in the preceding 24 months. If the debt is assumed within 90 days after the work is completed, the debt covers expenses paid within 24 months before completion up to the date the debt was assumed.
Since this special situation covers expenses already paid, you could spend the proceeds of the new debt on whatever you want and it will count as acquisition debt up to the cost of buying or improving the home previously.
In the case of a cash-out refinance or HELOC, any money borrowed will be non-acquisition debt until spent to buy or significantly improve the qualified home. During this time, the loan is a mixed-used mortgage and interest on the non-acquisition portion of the debt cannot be deducted. The loan remains a mixed-used loan until the non-acquisition portion is paid down or used on improvements. So @Sri16 cannot deduct the interest paid for the six months the money remained idle but can once the it is spent on the improvement.
