Do you have a self-managed super fund (SMSF) and looking to invest in property? You might’ve heard that it’s possible to do so but are unsure of the details.
It’s certainly important to know the rules for investing in property through an SMSF. For that reason, we’ll cover all of them here! This article will give you all the information you need on how to go about investing in property with your SMSF. Let’s get started.
The Short Answer: SMSFs Can Invest in Property
To answer the lingering question on SMSF property investment, yes, it’s possible. SMSFs can invest in property, but the SMSF trustees must abide by a particular rule set to do so.
So, what are the rules? Let’s look at the SMSF property investment basics below.
- The “sole purpose test” – the property must be purchased only for retirement investing for fund members.
- An SMSF member may not acquire property from a related party.
- The property must not be lived in by SMSF members or any SMSF members’ related parties (this would include parents).
- An SMSF can’t rent out the property to SMSF members or any SMSF members’ related parties.
Note: If the SMSF is used to purchase a commercial property, it can be leased to SMSF members for their business. Yet, it’s worth mentioning that the SMSF property has to be leased at the market rate and adhere to specific rules.
What Are the Costs Involved in an SMSF Property Investment?
The next question that arises when looking into SMSFs and property investment is the fees involved. Taking a closer look at the costs of SMSF property investment will help you make a better decision about whether or not to proceed with investing in this way.
The common costs include:
- Legal fees
- Advice fees
- Upfront fees
- Stamp duty
- Ongoing property management fees
- Bank fees
- Repairs and maintenance costs
- Council fees
In addition to the cost, it’s essential to take caution of the SMSF property investment traps that are out there.
For instance, there are groups of investment spruikers who recommend each other’s services to SMSF clients. You should be wary of this sort of arrangement, as it might indicate that they’re recommending products that provide them with the highest commissions rather than what’s best for you.
SMSF property investment fee traps can also include bonuses and discounts on real estate agents’ advice fees. Therefore, be sure to obtain independent advice when looking into SMSFs and property investment.
You can also find out if the SMSF property investment adviser holds an AFS license (Australian Financial Services) by checking ASIC Connect’s Professional Registers. If they don’t have an AFS license, they can’t give you SMSF investment advice.
Considering SMSF Borrowing?
SMSF borrowing is another area of SMSF property investment that many members consider. In this case, the arrangement is called a “limited recourse borrowing arrangement” (LRBA), and it entails that you can solely purchase one asset (be it a residential or commercial property).
Borrowing within your SMSF also involves a couple of risks that you should be aware of. Here are the essential ones:
Potential Tax Losses
SMSFs are taxed on a fair-value basis, which means that if your SMSF property has an unrealised capital loss, you may not be in a position to claim it against the SMSF taxable income.
Liquidity and Cash Flow
All loan payments must be made from your SMSF. That means that your SMSFs must have cash available to cover the loan repayments and associated costs at all times.
Difficulty of Cancellation
If your LRBA documentation and contracts aren’t prepared correctly, you won’t be able to undo the deal. In that case, you may have to forcefully sell the property, potentially resulting in major losses for the SMSF.
Generally speaking, LRBA loans will have higher interest rates and expenses as SMSFs don’t have the same access to funding options that other property investors do. Therefore, the loans are much more costly than typical property loans.
Prohibited Property Alterations
Last but not least, as long as the SMSF property is under the LRBA structure, SMSF members are not allowed to undertake significant improvements to the property,
Frequently Asked Questions:
What Property Can an SMSF Buy?
An SMSF can buy any property type as long as it’s used for the SMSF members’ benefit in terms of retirement. That applies to both commercial and residential properties.
What Are the Tax Implications of Property Investment Through an SMSF?
SMSFs are generally taxed at 15% on income or capital gains that result from a property investment. However, if you hold the property for more than a year, the fund becomes eligible for a one-third discount on the total capital gain. Income and capital gains are tax free once the SMSF is in retirement phase.
What Are the Borrowing Criteria for SMSFs?
The requirements vary between lenders. Generally however the SMSF should be able to demonstrate it has enough cash to cover 30% of the property value as a deposit and that the rental payments will cover the loan repayments.
SMSFs are an ideal vehicle for investing in a property if you have a solid strategy and ensure all rules are considered
However, if you are unsure on if property investing is right for your SMSF, or if you wish to clarify the requirements, we are always happy to assist.