refinancing to convert PPOR to IP?

Hi I'm moved from Brisbane to North Queensland and now my principal place of residence in Brisbane I want to convert into an investment property but I want to buy another principal place of residence in North Qld. The balance on the loan of my Brisbane PPOR is almost zero as I wanted to have this cash available to me in case i needed it (without closing the loan altogether).

If I refinance my Brisbane PPOR to $600,000 and use that $600,000 towards a PPOR in North Qld, and start renting out Brisbane as an IP, is it correct that I am not able to claim the interest paid on my Brisbane IP as the funds are not used for investment purposes, even though the security (ie the Brisbane IP) is an investment?

The new PPOR in North Qld will not be mortgaged.

However, if I used the refinanced $600,000 towards a managed fund, then I could claim the interest as a tax deduction as this money is being used for an investment?

Correct. The money drawn down has to be used for income producing purposes (eg a distribution paying managed fund is an "income producing instrument").

IF you had put money in an OFFSET instead of paying "into" the loan (i.e. same effect - keep loan open, no interest charged as loan is offset), then totally different issue - the money can be taken out and used for any purpose, as in the eyes of the ATO, the loan has NOT been repaid (merely "offset"). Small technicality, same effect at the time, but big implications later....

The Y-man
Hi Daniel,

This is not tax advice (blah blah) but yes the use of the funds is what is important, not the use of the security. So if you use the funds for purchasing a PPOR, the loan would not be tax-decuctible. If you used the loan for investing in managed funds (or purchasing an investment property) the purpose would be investment so the loan would be deductible. Cheers.


Cameron Perry
Perry Financial Strategies
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Is the property in Brisbane owned solely or jointly.

One consideration could be for the higher income earner to purchase the interest of the other party in the property or altenatively sell the property into Trust and borrow the full $600K or market value.

This way the interest on the loan would be fully deductible and you could then use the net proceeds as you so wish.