@whodiini: You are misinterpreting the mixed-used rules you cited. For mixed-used mortgages, according to Pub 936, you have to figure the average for the Total Balance, Acquisition Balance, and Equity Balance separately. In order to do this, you have to keep a spread sheet of monthly balances of each category. Sum each category separately and divide by the number of months the home was a qualified home during the year. So now you have average total balance (500K), average acquisition balance (150K), and average equity balance (350K). Then the deductible interest is 150K / 500K = 30%. I don't know where you are getting the Interest Rate * 150K method from. There is an 'Interest paid divided by interest rate' method described in Pub 936 but it doesn't apply to mixed-used mortgages.
@u0d4n7a0p: No we are not agreeing that it is okay to pay down the 150K acquisition balance first. The sources you cited are rules for tracing interest expense to debt only. When it comes to mixed-use mortgages, these rules allow you to trace the interest on the equity balance to what it was use for, rental property.
