I decided to summarize my thoughts after bouncing back and forth on this issue to reduce some confusion.
In the example used by @u0d4n7a0p
where a $500k refi was done on a primary home and the $150k proceeds refied the remaining mortgage and $350k was used to fund a rental home:
Home acquisition indebtedness 150K
Home equity indebtedness 350k, which is used to fund rental
Note that there is not a separate category here of business use. It is the home equity debt used for business. This is an important distinction.
Then publication 936 comes into play for mixed use mortgages:
" If the average balance consists of more than one category of debt (grandfathered debt, home acquisition debt, and home equity debt),
Figure the balance of that category of debt for each month. This is the amount of the loan proceeds allocated to that category, reduced by your principal payments on the mortgage previously applied to that category. Principal payments on a mixed-use mortgage are applied in full to each category of debt, until its balance is zero, in the following order.
First, any home equity debt not used to buy, build, or substantially improve the home.
Next, any grandfathered debt.
Finally, any home acquisition debt.
Add together the monthly balances figured for b and c in (1)."
Then the deductible amount of interest follows the allocation of interest on the remaining principal.
e.g. Home acquisition interest = (interest rate*150k) until principle owed drops to 150k. Home equity debt interest = total interest - home acquisition interest until $350k is paid off.
That is how I originally understood this to be.
