Can I live in my SMSF property when I retire?
Conditionally, yes, you can live in the SMSF property once retired but under certain conditions including that you first take the property out of the SMSF via a lump sum payment having reached preservation age.
Buying and holding property can be a great investment in your SMSF, it can be sweetened further if you bought a property in an area you would eventually like to retire to mortgage free! But how does it work without breaching any of the Superannuation laws?
Firstly, and unsurprisingly, you will need to meet a condition of release – as you cannot use any part of your superannuation for your own benefit until you meet one of these conditions. For most people looking into this arrangement this will mean you are over 60 AND fully retired or are aged over 65.
The next step is to determine the market value of the property. This needs to be independently appraised and will confirm the amount the property would likely achieve if it was sold on the market to a third party.
“But why does that matter – we aren’t selling the property?”
You are correct to a point. While you aren’t selling the property on the open market you will be essentially selling the property to yourself…
Which brings us to the third step – your member balance! You will need to have a member balance that exceeds the value of the property. So that you are able to live in the property owned by the SMSF you will need to take the value of the property as a lump sum benefit which requires you to have that amount able to be withdrawn from your member balance. The other option is that you purchase the property from the SMSF using cash. Like with any property transaction you will still need to factor in and pay for stamp duty and conveyancing costs.
While this approach will allow you to live in the property it’s not the best set up from a tax point of view. The best approach is for you to commence a pension prior to arranging to transfer the lump sum. Being in Pension mode will mean that there will be no capital gains tax on the transfer of the property in the SMSF – potentially saving thousands in tax!
However, like all good things there are strings attached – if you commence a pension you will need to meet the minimum drawdown requirements and the lump sum of the property falls outside of this as the pension needs to be withdrawn as cash with the amount dependent on your age and member balance. But it’s not all bad, you could always withdraw the money to cover the stamp duty and conveyancing costs!
So what are the downsides?
The biggest is that you are removing what is likely to be a large asset from your superannuation. Not only will this significantly reduce your member balance, but it will also reduce the income as you will no longer be receiving the rental income to the SMSF. This may mean the SMSF is no longer viable and therefore wound up.
Does this still apply for multi-member funds?
For the most part it does – the major changes are that you will need to ensure that all members who will be living in the property (for example spouses) have each met a condition of release and have the balances available to cover the transfer of the property from the SMSF.
As is it can be a complicated process, it will always be in your best interest to discuss your plans and goals with a professional and make sure everything you do is compliant from the start and in line with your investment strategy and meeting the sole purpose test of the fund.