my advice see a tax pro that can sort through the situation with actual facts and numbers.
in my opinion the refi of A presents some problems. any amount over and above the mortgage balance at the date of the refi is not acquisition debt so interest on that portion is not deductible. House B was not security for the debt so even if you attribute a portion of the refi and intertest to it, the interest is not deductible.
renting out property B to family members at less than fair rental value would result in the residence being treated as a second home. the rent wouldn't be taxable but the only deduction I see is real estate taxes on schedule A. no mortgage interest would be deductible because the mortgage on A is not secured by the property B. taking out a mortgage on B wouldn't help because the mortgage would be in excess of the existing debt which is zero.
also realize that the deduction on schedule A for all taxes is limited to $10K
