HI David,Technically with the interest tracing rules, the interest should be deducted on Schedule E (against your rental property) regardless of which house actually is being used to secure the loan.If you are ever audited, an IRS agent might try to argue that the mortgage interest should be deducted on Schedule A if you secured the loan with your principal residence, so make sure you keep good documentation proving that you used the funds to purchase a rental.

Having a W2 income and claiming RE Professional Status is a great trigger for an IRS audit.

You have the advantage.Plus having both you and your dad's names on the title instead of an LLC might lead to the IRS audit (even though I'm pretty sure it will be nothing, but it's just a hassle).Again, consult with CPA and Attorney for the best setup.

Be careful selecting codes as your business will be viewed on par with others, any large differences can trigger audits.

It will be a tough explanation for a field agent if ever audited. 

There are lots of people who have done all kinds of things and been fine, it's just because they haven't been caught or audited yet.Seek the guidance of a tax professional before doing anything (or at least educate yourself as best you can).  

Achieving (more importantly justifying) Qualified Real Estate Professional status is doable but complex and you’re going to need your own property in order to justify having annually spending that amount of hours (it is highly unlikely that any QREP audit would hold water based on you (or non W2/1099 income spouse) allocating the required hours on someone else’s passive deal).

Clients who, I am proud to say, have never once been audited due to the tax positions I've recommended to them.  

Plus, ask them how many audits they have been through.

My CPA's main concern is IRS audits, and how do I explain what I did.When I had the triplex, I had a real head scratcher.