Your SMSF and property investment
Using your SMSF to purchase real estate can offer great advantages to your retirement planning.
Using your SMSF to buy an investment property can be a savvy investment strategy, but it can also be complicated.
In this blog, we explore how you can use your SMSF to invest in property, as well as the key benefits and drawbacks.
The Australian Taxation Office has some rules and regulations that you must follow when using your SMSF to purchase a property.
You must meet the ‘Sole purpose test’. That means you and your relatives cannot live in a property your SMSF owns.
The real estate transaction must be made at arm’s length. Your SMSF cannot buy a property from a fund member or anyone related to the fund. For example, your SMSF can’t purchase a property that belongs to your parents.
For commercial properties the rules differ. You can buy commercial properties from fund members or related parties as long as the transaction is conducted at market value. Additionally, these properties can be leased to fund members or their relatives at market rates.
Benefits of using your SMSF for property investment:
Tax advantages: Rental income and capital gain from properties held in a SMSF are generally taxed at a lower rate. If you’re of retirement age, this could mean you enjoy a tax rate of 0%!
Tax deductions: You can deduct expenses related to the property, such as repairs, maintenance and management fees from the SMSF’s taxable income. Loan repayments are also tax-deductible.
Diversification: Investing in property helps spread risk across your portfolio, balancing your overall investment strategy.
Leverage: Some people aren’t aware that SMSFs can borrow to invest in property. This means you are using other people’s money to invest, allowing you to amplify your potential returns.
Capital growth: Over time, the investment property may appreciate in value, providing you with a valuable asset in your retirement.
Income generation: The rental income from investment properties can contribute significantly to your SMSF’s cash flow.
Lease the investment property to your business: If you are a business owner, you can use your SMSF to purchase a commercial property, which you can then rent to your business. The rent your business pays to your SMSF can be deducted from the business’s gross revenue, and you may have an asset that appreciates over time. Win-win!
While investing in property can supercharge your super fund, it does come with some risks.
Market risks: property values can fluctuate, which might lead to a decrease in asset value.
Lack of liquidity: Real estate isn’t always easy to sell quickly if you need to access funds.
Need for cash flow: You need sufficient cash flow to meet expenses, such as loan repayments. Also, unexpected maintenance costs and tenant issues can impact your overall returns.
Lending requirements: Specific laws relating to SMSF and borrowing, called limited recourse borrowing arrangements (LRBA) can make the process more complex and expensive. Most SMSF lenders, including W&D, require independent legal and/or financial advice to complete a loan application.
By understanding the benefits, risks and regulations, you can make informed decisions about using your SMSF for property investment. With the right approach, you can turn super into a powerful tool for your financial future.
If you would like to chat with Michael Rice, W&D’s Finance Manager, about our options for your SMSF, call us today on 0413 238 152.
The information provided in this blog is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. You should, before you make any decision regarding any information, strategies or products mentioned in this blog, consult your own financial advisor to consider whether that is appropriate having regard to your own objectives, financial situation and needs.