Whilst there are MANY articles about this purchase “opportunity” of acquiring property within a SMSF, it needs to be outlined, the “trend” is not a simple activity.
Utilizing SMSF to buy into the property market has become the “trend” in recent years, however, you need to make sure you consider how buying through an SMSF may impact your investment in the present and when it comes to offloading the asset.
With the adjustments in this financial year's Federal Budget to allow up to six members in an anyone SMSF at a time, this might also provide buyers with more purchasing power in their SMSF, however, it does not mean it is the RIGHT way to go about the purchase for everyone.
In this article, we discuss generally buying a property through an SMSF, key considerations and most importantly, some of the stringent property rules for SMSFs (there is a lot!).
SMSF Property Purchase: Simply put, you can buy investment properties through an SMSF through using the funds in your SMSF or using part of your super balance to borrow for a single property investment or identical assets with the same market value.
Borrowing for investment properties through an SMSF can be done through a Limited Recourse Borrowing Arrangement (LRBA). An LRBA allows SMSF trustees to have a beneficial interest in an asset with legal ownership held in a trust. This protects your super fund and places restrictions on how debtors can recover funds if you default on your loan.
SMSF Considerations Prior to Purchase: It may not even be worth the rigmarole.
Before you buy an investment property through an SMSF, you need to consider a few key factors.
Firstly, you'll need to identify what sort of property would be suitable to purchase for your SMSF
Secondly, you have to establish if it's worthwhile setting up an SMSF to buy property if you don't already have a fund established.
SMSF Property Purchase Pro’s: Buying an investment property through an SMSF offers a range of tax advantages.
Super funds are taxed at 15 per cent, which is much lower than the marginal tax rate for an average income in Australia (30 per cent). For properties purchased through an SMSF, your capital gains will also be eligible for discounts. If you sell a property in the accumulation phase, capital gains will be calculated at the discount rate, which is 33.3 per cent. Properties sold in the pension phase will not be subject to CGT.
While people have been using Self-Managed Super Funds to purchase investment properties for a long time, the difference now is that you can use your SMSF to borrow the money you need to do so.
Investments in property fluctuate less than in shares, giving you more control. Though buying outright is far less complex, the option to secure a mortgage means more people are able to invest in property through SMSF.
SMSF Property Purchase Con’s: Though shares are likely to fluctuate more than property investments, the property takes far longer to sell than shares do and selling will generally cost more to offload too. You might also be stung by the housing market when you want to sell – the value of the property may not have risen.
Buying residential property through an SMSF If you buy residential property using your SMSF, you can't live in the property, and a family member can't live in the property either. Investment properties can only be rented out in the market like regular investment properties.
Your SMSF can only be used to buy either an investment or commercial property. It cannot be used to buy yourself or a family member a property, including for personal rental purposes – it must be rented out to tenants outside of your family, so cannot be used to benefit you or your family before retirement Before you buy a property through an SMSF, make sure you speak with qualified financial and legal professionals to make sure this approach is suitable for you.
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If you need someone to talk to in relation to your matter that is outside of our realm of purchase and management of your property, send us a message, we know great people for you have a confidential chat with!
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Remember, this article does not constitute financial or legal advice. Please consult your professional financial and legal advisors before making any decisions for yourself.