Sorry for the repost. But I wanted to ensure the misinformation above was addressed.
The original answer above is correct, you CAN DEDUCT HELOC INTEREST against your home or your rental property, business, or other investments. The tracing rules apply. All the comments above are wrong.
Complete table 1 of Publication 936. The resulting line 16 has the following instruction:
"You can't deduct the amount of interest on line 16 as home mortgage interest. If you didn't use any of the proceeds of any mortgage included on line 12 of the worksheet for business, investment, or other deductible activities, then all the interest on line 16 is personal interest. Personal interest isn't deductible."
So you can't deduct it as home mortgage interest. But it clearly distinguishes business, investment, or other deductible activities (aka rental properties) from personal interest. And it says only "personal interest is not deductible." It doesn't prohibit business, investment, or other deductible activities from being deducted.
Table 2 even tells your which forms to carry the interest to for the appropriate deduction. Keep in mind that this publication is titled "Home Mortgage Interest Deduction." So if this form is specifically directing you to carry 1098 interest to other schedules for deduction, clearly the IRS is saying it is deductible.
