Thanks. Here is what I see.
936 says that mortgage deduction is limited to 750K (or whatever is the acquisition debt) and you are supposed to calculate by using it as numerator over average monthly balance and then multiplying the same with interest for that year (Assuming you had mortgage for the whole year). Whether the rest of the intrest is deductible entirely boils down to how the rest of the interest was used. if 25% of your home was used for passive activity, then 25% of total interest is the expense for earning the income through passive activity.
We are now on to debt repayment. Personal debt (home equity debt) is paid first followed by acquisition debt and then passive activity debt and so on. This is from "Mortgage Interest and the Tracing Regulations After the Tax" by Donna M Byrne.
If you find anything which contradicts our current understanding or something which is very different from either of our understanding in future, please do post here.
Thanks for your time.
