diff --git a/src/libs/actions/Policy/Policy.ts b/src/libs/actions/Policy/Policy.ts
index 888e10bc363f..5750a191cbb3 100644
--- a/src/libs/actions/Policy/Policy.ts
+++ b/src/libs/actions/Policy/Policy.ts
@@ -4363,12 +4363,15 @@ function createWorkspaceFromIOUPayment(
         });
     }
 
-    // To optimistically remove the GBR from the DM we need to update the hasOutstandingChildRequest param to false
+    // To optimistically remove the GBR from the DM we need to update the hasOutstandingChildRequest param to false.
+    // We also clear iouReportID so the moved IOU report is no longer resolved from this DM when a new expense is
+    // created there (otherwise the moved report would be reused and "reappear" in the DM preview).
     optimisticData.push({
         onyxMethod: Onyx.METHOD.MERGE,
         key: `${ONYXKEYS.COLLECTION.REPORT}${oldChatReportID}`,
         value: {
             hasOutstandingChildRequest: false,
+            iouReportID: null,
         },
     });
     failureData.push({
@@ -4376,6 +4379,7 @@ function createWorkspaceFromIOUPayment(
         key: `${ONYXKEYS.COLLECTION.REPORT}${oldChatReportID}`,
         value: {
             hasOutstandingChildRequest: true,
+            iouReportID,
         },
     });
 
diff --git a/tests/actions/PolicyTest.ts b/tests/actions/PolicyTest.ts
index eb859463f640..54891ab73b58 100644
--- a/tests/actions/PolicyTest.ts
+++ b/tests/actions/PolicyTest.ts
@@ -6805,5 +6805,63 @@ describe('actions/Policy', () => {
             apiWriteSpy.mockRestore();
             isIOUReportUsingReportSpy.mockRestore();
         });
+
+        it('should clear iouReportID on the old DM chat optimistically and restore it on failure', async () => {
+            await Onyx.set(ONYXKEYS.SESSION, {email: ESH_EMAIL, accountID: ESH_ACCOUNT_ID});
+            await waitForBatchedUpdates();
+
+            const employeeAccountID = 400;
+            const iouReportOwnerEmail = 'employee@example.com';
+            const oldChatReportID = '901';
+            const movedIouReportID = '900';
+
+            const iouReport: Report = {
+                ...createRandomReport(1, undefined),
+                reportID: movedIouReportID,
+                type: CONST.REPORT.TYPE.IOU,
+                ownerAccountID: employeeAccountID,
+                chatReportID: oldChatReportID,
+                policyID: 'oldPolicyID',
+                currency: CONST.CURRENCY.USD,
+                total: 1500,
+            };
+
+            await Onyx.set(`${ONYXKEYS.COLLECTION.REPORT}${iouReport.reportID}`, iouReport);
+            await waitForBatchedUpdates();
+
+            const isIOUReportUsingReportSpy = jest.spyOn(ReportUtils, 'isIOUReportUsingReport').mockReturnValue(true);
+            const apiWriteSpy = jest.spyOn(require('@libs/API'), 'write').mockImplementation(() => Promise.resolve());
+
+            const mockTranslate = ((key: string) => key) as unknown as Parameters<typeof Policy.createWorkspaceFromIOUPayment>[8];
+            Policy.createWorkspaceFromIOUPayment(iouReport, undefined, ESH_ACCOUNT_ID, ESH_EMAIL, iouReportOwnerEmail, undefined, CONST.CURRENCY.USD, undefined, mockTranslate, {});
+            await waitForBatchedUpdates();
+
+            const writeOptions = apiWriteSpy.mock.calls.at(0)?.at(2) as {
+                optimisticData?: Array<{onyxMethod?: string; key?: string; value?: Record<string, unknown> | null}>;
+                failureData?: Array<{onyxMethod?: string; key?: string; value?: Record<string, unknown> | null}>;
+            };
+
+            const oldChatKey = `${ONYXKEYS.COLLECTION.REPORT}${oldChatReportID}`;
+            const optimisticOldChatUpdate = (writeOptions?.optimisticData ?? []).find(
+                (update) => update.key === oldChatKey && (update.value as {iouReportID?: string | null} | null)?.iouReportID !== undefined,
+            );
+            const failureOldChatUpdate = (writeOptions?.failureData ?? []).find(
+                (update) => update.key === oldChatKey && (update.value as {iouReportID?: string | null} | null)?.iouReportID !== undefined,
+            );
+
+            // Optimistic update should clear the dangling pointer so a fresh IOU report is built
+            // for the next expense in this DM (the moved report otherwise gets reused via getMoneyRequestInformation).
+            expect(optimisticOldChatUpdate).toBeDefined();
+            expect((optimisticOldChatUpdate?.value as {iouReportID?: string | null})?.iouReportID).toBeNull();
+            expect((optimisticOldChatUpdate?.value as {hasOutstandingChildRequest?: boolean})?.hasOutstandingChildRequest).toBe(false);
+
+            // Failure rollback must restore the previous iouReportID so the DM chat is back to its prior state.
+            expect(failureOldChatUpdate).toBeDefined();
+            expect((failureOldChatUpdate?.value as {iouReportID?: string | null})?.iouReportID).toBe(movedIouReportID);
+            expect((failureOldChatUpdate?.value as {hasOutstandingChildRequest?: boolean})?.hasOutstandingChildRequest).toBe(true);
+
+            apiWriteSpy.mockRestore();
+            isIOUReportUsingReportSpy.mockRestore();
+        });
     });
 });