I think you would agree with what "Mortgage Interest and the Tracing Regulations After the Tax" by Donna M Byrne is saying. IRS doesn't care for loan products - refinance, mortgage, HELOC and so on. If you see the said document and see the memo we discussed earlier, there are two things that it says:
1. Entire debt obtained by securing the property can be allocated for another purpose. At that point interest is not deductible under itemized deductions and can only be set against the the income generated by the activity to which debt is assigned. Tax payer needs to make this selection explicitly in writing and it remains effective for all the years after the selection unless commissioner agrees with the tax payer to change the allocation.
2. Tax payer can choose to set aside a portion of debt obtained by securing the loan for another activity and the same need not be through an explicit written request. Interest on the debt which is set aside can be deducted only from income generated by the activity to which it is assigned to.
Your argument is that this is applicable only when the debt in question is home equity debt and is not applicable when it is home acquisition debt. Did I understand you right?
