First of all, you can debug with just one install.
The debugged instance, can be the same as the debugging one.
If you like you can pass the debugged instance a different primary conf path.
Second, in any case you need to rebuild the IDE you want to debug by hand. F9 will not compile it proper. (At least I have not found a way...)
That is easier if all is in one install, unless the change you try to debug is crashing. (But even then, just don't restart the main IDE - I do it that way all the time).
I am not 100% sure on your question, but a few pointers, if you want to follow them up....
Maybe the lazarus.lpi contains: $(LazarusDir) Or similar? That would resolve to the development ide.
As for, why in this case, do the breakpoints work?
Well the debugger falls back to using the filename without path. So it is able to set the breakpoints anyway.
Also not sure, but: You did build the second instance, in its own folder? The compiler would have put the path of the 2nd instance into the debug info?
If you copied the existing exe from the development folder, the debug info may have full path to that folder, and the debugger could report that back to the IDE....