use your common sense. Don't play dumb

If you bought the second house BEFORE the loan, how can you argue that "the loan proceeds are used for ... business ... or investment activities"? 

 

https://www.irs.gov/publications/p535

Allocation of Interest

The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds.

Allocate your interest expense to the following categories.

• Nonpassive trade or business activity interest.

• Passive trade or business activity interest.

• Investment interest.

• Portfolio interest.

• Personal interest.

In general, you allocate interest on a loan the same way you allocate the loan proceeds. You allocate loan proceeds by tracing disbursements to specific uses.