@u0d4n7a0pIn response to your asking for IRS reference that requires you to pay off the equity debt prior to the acquisition debt, I refer you to the handout you ask me to read, 'Mortgage Interest and the Tracing Regulations After the Tax Cuts and Jobs Act of 2017'. This handout explains the order of payoff when a loan has different categories of debt in accordance with Section 1.163-8T of the tax code. Look at part B, 'Repayment Ordering Rules' on page 17. Personal debt is repaid first in the order. Home mortgage debt is classified as personal debt consisting of Acquisition debt and Equity debt. Pub 936 specifies that Equity debt is paid down before Acquisition debt. The $350K for the rental is equity debt because the rental home does not secure the loan. Note that interest on personal debt is generally not deductible but the tax code makes an exception for interest on home acquisition debt.
