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How does that work?

There are 2 loans: 1. $400,000 which was borrowed to purchase the property, and 2. $300,000 which was borrowed for??? Loan 1 would be deductible if the property is rented as it relates to the borrowing of money to generate income. Loan 2 would be deductible if you borrowed the money to...

When you increase a loan and use the funds to buy property B if you later sell property B you cannot keep claiming interest on the loan increase as what is the purpose those funds were used for? It shouldn't be messy at all.

No. Because once you have sold the property you couldn't keep claiming the interest associated with that property.