Unfortunately, the ATO applies an 'intention' or 'purpose' test to determine deductable debt. So if the loan on your current residence is say $x, when you turn it into an investment property, only the interest from the original loan of $x is deductible. Any increase or extra mortgages you take out against this house are also subject to this intention test. Meaning, If you take out a new motgage of $400k against your current residence, the purpose being to pay off your 'new' residence, the interest is NOT deductible - even though it is secured by the Investment property. If you used this $400k to go towards another investment property, then it would be deductible.
So basically it depends on what your intention or purpose is for the funds you are borrowing - if they are to go towards an investment (property, shares, etc) the interest is deductible, if they are to go towards personal use (PPOR, car, hoilday, etc) then the interest is not deductible.
By all means talk to an accountant, however before you do ensure that the accountant specialises or deals regularly with property investment - many don't and thus often make mistakes in relation to these issues. Deductible debt and expenses in relation to property is one of the biggest areas targeted by the ATO due the the HUGE number of mistakes made by people.
If you need more information on this, pm me - I can direct you to a website that will provide a wealth of information about property investment. Otherwise check out the ATO website, they have alot of 'senarios' to help explain the various rules.
We looked into doing this kind of thing when we wanted to upsize our house. Due to the tax issues, it worked out that it would be more beneficial for us to buy a new investment property than use ours as a rental. I think due to the reason misty mentioned above (but I too find this confusing). Worth checking it all out now!
Lucy in the sky with diamonds.
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