I've been trying to follow the variety of threads whereby people want to change their PPOR into an IP. Their PPOR usually has a mortgage on it of some description.

Am I correct, based on what I have read, that if this is the intention then a LOC type loan is best suited for this purpose.

The idea that the LOC is as large as possible based on the property value, but the actual amount outstanding is whatever the previous mortgage amount was?

The idea being that if you make the PPOR a rental property you then "pull out" all of the funds available in the LOC (up to its limit) to go towards the next PPOR?

Given that an LOC is like an IO loan with a built-in offset account (to me at least, someone correct me if I'm wrong), does either loan type permit a higher LVR?

My next question then is if one refinances a PPOR from P&I to LOC and then pulls out funds later when the PPOR becomes and IP, is is legitimate to start claiming the interest on the LOC as a tax deduction for that IP?

Or is this irrelevant because you withdraw money from the LOC which was not for investment purposes (eg. to finance a new PPOR). Bit confused about that.



The general fix for your issue which may NOT apply because everyone is different is to do the following.

This is the basic - no aggressive tax saving model.

1. Say your PPOR mortgage is 100 k. Convert the P&I loan to an I/O loan and have it as a separate split to keep the tax acct happy.

2. Providing your serviceability can stand it, put in a second split, and third split using either a Line of Credit product OR an offset product that works with I/O Loans.

Say you have 200 k more borrowable equity, and the new PPOR will be 500 k + costs.

Then split 2 needs to be 100 for deposit and say 20 k for costs so 120 k combined for the new PPOR, this is thereby non deductible debt but should still be I/O if possible.

Split 3 is the balance of say 80 k whihc can then be used for further IP borrowings.

Usage or trail of funds will always determine tax deductability - use the funds for PPOR then NOn deductible.


I think that just really confused me.

If the new PPOR is $500K, I seem to end up with 3 splits totalling only $300K? Should I have a total loan now of $600K (the original $100K from the original PPOR mortgage and now the $500K for the new residence)?

What amount on the original PPOR (which has now become the IP) is now tax deductible?

Sorry, I'd like to think I'm good with numbers but I'm not following.
Hi Rolf,

I'm really interested in this issue too but must admit I also don't really follow yet. Could you explain again?


G'day Kevmeister,

Maybe this will help to shed some light on your situation. Have a read thru it, and see how you go.

If I've done it correctly, this should be a link to my BFO thread from the old forum.


That seemed to work OK :) What this thread should do is to give you a bit of a look at the tax deductability of your "old" PPOR. Be sure to read thru to THE END - as it is my final post that explained where I had been "going wrong". My "Blinding Flash of the Obvious" (BFO) :)


Im confused too, I like pictures.

Someone please help me with coverting a MS powerpoint slide to a web friendly format so I can post it

G'day Kevmeister,

Just in case the "BFO" post didn't help, let's take it step by step.

Kevmeister>> "I think that just really confused me. If the new PPOR is $500K, I seem to end up with 3 splits totalling only $300K? Should I have a total loan now of $600K (the original $100K from the original PPOR mortgage and now the $500K for the new residence)?"

Les>> Rolf had said "Say you have 200 k more borrowable equity" which meant you could borrow another 200k over and above the original 100k - total 300k against your old PPOR.

Rolf was working on the basis that you would get an 80% loan against the PPOR ($400k), then need a further $100k + costs to complete the deal (say, $520k). His idea was to split the borrowings against the OLD PPOR this way:-

1. The original mortgage - $100k
2. Borrowings for PPOR - (say) $120k (20% + costs)
3. Remaining $80k as potential deposits for IP's

By keeping these separate, the ATO requirements can be easily met (keeping deductible and non-deductible separate).

Kevmeister>> "What amount on the original PPOR (which has now become the IP) is now tax deductible?"

1. the original amount of the original PPOR ($100k) is tax deductible.
2. The deposit + costs amount of the new PPOR is NOT tax deductible.
3. If you then use the remaining $80k as deposit for an IP, then this is also deductible. I suspect this could also be invested in Shares, etc - as long as it is "invested", it should be deductible. But, if you buy a car/boat/world trip for pleasure, then "No!!"

Hope that helps,
Cool. Understand now.

I guess the highlight of all this (I haven't read the other thread yet, thanks Les) is that I can't redraw the equity from the PPOR for "non-deductible use", leaving a larger loan on the property, which then becomes the IP and hence the loan becomes tax deductible.

Now that leads me to probably an accounting type question:

Hypothetically speaking, if I have $200K of "borrowable" equity in my house, I should be entitled to draw that back and spend it on whatever I want (house, car, holiday, boat etc).

Let's say I did that X years ago such that my mortgage went back to 80%. And today I change my PPOR into an IP.

What is the ATO likely to think about that? ie. the fact I did it quite a few years ago, possibly for quite a legitimate purpose even.

And, the important point is, if they are going to allow it, then what stops me not using the money or a house/car/holiday/boat etc and using it towards a new PPOR?

For example, take said borrowable equity and instead move it into an offset account against the loan, hence the "cost" is the same in terms of monthly payment but now the house is hocked up to 80% and lots of $ in an offset account that is "mine".

Anyone know the rules on when this is acceptable and when it isn't?

The way I understand it is this....lets say you paid your loan down to X. If you then re-drew money for private purposes (say "Y") you can NOT claim Y as tax deductible when you convert your PPOR into an IP. The only loan amount that is tax deductible is X, NOT (X+Y). It does not matter how long ago you redrew the money, if it was used for private purposes it's not tax deductible.

That's what is so good about offset accounts. You can achieve the same effect of paying down a home loan, but you have never really placed the money in the actual loan. Therefore, when you redraw money from the offset account, you have NOT drawn down on the loan and therefore have not compromised the tax deductible amount of the loan at all.