How to Decide if You Should Buy Property Through Your Self-Managed Super Fund (Without Ending Up Confused)

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Have you been thinking about buying property through your self-managed super fund (SMSF)?

It’s a very different scenario to buying property privately. And it’s incredibly common for people to turn their back on the idea as confusion reigns over the differences.

While we can’t make the decision for you, we’re going to answer your questions about buying property through your SMSF so you’ll have a clear understanding of all the ins and outs.

We’re going to make your decision-making process a whole lot easier.

Let’s begin.

The benefits of buying a property through an SMSF

  • Control. Property is tangible. Therefore, it gives you a greater sense of control when compared to many complex investment products.
  • Diversification. Spread your risk by adding bricks and mortar to your SMSF investment portfolio.
  • Faster debt reduction. An SMSF loan can be repaid using pre-tax dollars, which means you’ll be able to pay your loan off faster and save tens of thousands of dollars in interest.
  • Tax savings. Expenses such as interest on your SMSF loan, council and water rates, insurance and maintenance costs can all be claimed as tax deductions. They’ll then be used to reduce your fund contribution amount and income tax.
  • Reduce capital gains tax. Capital gains tax on an SMSF investment that is held for more than 12 months is capped at 10%. However, once you convert your super into a pension, you are exempt from capital gains tax. So, you can potentially save hundreds of thousands of dollars if your SMSF purchased property is sold when fund members are in ‘pension phase’.
  • Easy to fund. In many cases, the member contributions and rental income received from SMSF properties are enough to cover the investment costs and loan interest repayments.
  • Higher growth potential. Borrowing money to buy property through super will considerably increase the investable value of your super. You’ll significantly improve the potential to increase your net super balance over the medium to long term.
  • The hard and fast rules

    Because an SMSF is a superannuation fund, it’s governed by some pretty strict rules. It may seem tough, but they’re carefully regulated to protect the financial future of the members.

    The property:

    • Must pass the ‘sole purpose test’, meaning it can only provide a retirement benefit for fund members.
    • Must not be acquired from a relative of a member.
    • Must not be lived in or rented by a fund member or any fund members’ related parties.

    What can’t I buy?

  • A friend’s property. The term ‘acquaintance’ is fairly broad so don’t try and sneak under the radar. If you know the person who owns the property – it’s off limits.
  • Overseas property. It’s unlikely any lender will finance an overseas SMSF property purchase.
  • Property for redevelopment. It breaches the sole purpose test as a property earmarked for redevelopment and resale may be interpreted as more of a business arrangement than for the sole purpose of providing for retirement.
  • A holiday house. Owning a house you intend to use privately, even for just a day or two a year, breaches the sole purpose test.
  • It’s possible to buy commercial property

    In fact, it’s quite common. You can buy a commercial property and lease it back through your business. Once again, there are a few strict rules you must follow:

    The commercial property must be:

  • Commercially competitive. You must pay fair market rent for the property if your business rents it out. It’s regulated and audited by the ATO.
  • No rent breaks allowed. The lease arrangement must be treated as if you would with an unknown landlord. No rent breaks are allowed for any reason. Payments must be fair and continual.
  • Valuations. Regular valuations must be undertaken to meet SMSF compliance regulations.
  • Sole purpose test. As with residential property, the commercial property must pass the sole purpose test, and its purpose must solely be to provide a retirement benefit to its fund’s members.
  • Understanding complex SMSF property loans

    If your SMSF funds won’t cover the property cost, it’s possible to borrow funds. But, the type of loan you’ll need is different and more complex.

    It's called a ‘limited recourse borrowing arrangement’ or LBRA.

    An LBRA can only be used to purchase a single asset, for example, a residential or commercial property.

    Here are the pitfalls you should be aware of:

  • Higher costs. SMSF property loans tend to be more costly than other investment property loans.
  • Cash flow. Loan repayments must be made from your SMSF, which means your fund must always have sufficient cash flow to meet the loan repayments.
  • Possible tax losses. Any tax losses from the property cannot be offset against your taxable income outside the fund.
  • No alterations to the property. Until the SMSF property loan is paid off, alterations to a property cannot be made if they change the character of the property.
  • What do lenders look for?

    Most lenders require a 30% deposit, plus costs, and adequate projected rental income to cover loan repayments. They’ll look at your frequency of contributions to the SMSF as proof that you’re set up to meet ongoing repayment obligations. Your fund will have to be compliant with ATO and ASIC requirements as well.

    Fees and charges you need to be aware of

    SMSF property sales attract a different set of fees to traditional property sales. Be ready to pay upfront fees, legal fees, advice fees, stamp duty, ongoing property management fees, and bank fees.

    SMSF property purchases are complex by nature and take time. But they’re entirely possible with expert assistance and the right strategy.

    Just imagine how good you’ll feel with that final contract in your hand and your new SMSF property purchase set and ready to generate income for years to come.

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