Investing in property with a self-managed superannuation fund (SMSF) has become a popular option for pre, current, and post-retirees in Australia. SMSFs provide more control over investment decisions and allow individuals to take advantage of tax benefits. However, before investing in property with your SMSF, there are several things you need to know.
What is an SMSF?
An SMSF is a type of superannuation fund that is managed by its members, rather than a professional fund manager. The members of an SMSF act as trustees and are responsible for making investment decisions on behalf of the fund. SMSFs can have up to six members and provide more control over investment decisions compared to other superannuation funds.
Buying a Property with an SMSF
Buying property with your SMSF can provide several benefits and significant tax advantages. SMSFs can purchase residential or commercial property, but there are rules and regulations that must be followed. It is essential to seek professional advice when considering buying property with your SMSF to ensure compliance with these rules.
Benefits of Buying Property with an SMSF
SMSFs can provide tax benefits when investing in property. Rental income from property is taxed at a concessional rate of 15%, and capital gains tax is also discounted if the property is held for longer than 12 months. In pension phase, there is no tax to pay on rental income or capital gains incurred. SMSFs can also claim deductions for expenses related to the property, such as repairs and maintenance.
Control over Investment
Investing in property with your SMSF can provide more control over your investment structure compared to other superannuation funds. The members of an SMSF can decide which property to purchase, how much to spend, and when to sell. This control allows for greater flexibility and the ability to tailor investments to meet individual goals.
Potential for Long-Term Gains
Investing in property with your SMSF can provide the potential for long-term gains. Property values tend to appreciate over time, and rental income can provide a reliable source of income during retirement. SMSFs can also take advantage of negative gearing, which allows for tax benefits when the costs of owning the property exceed the income generated.
Steps to Buying a Property with an SMSF
Establishing an SMSF
Before investing in property with your SMSF, you must first establish an SMSF. This involves setting up a trust, appointing trustees, and registering with the Australian Taxation Office (ATO). It is essential to seek professional advice when establishing an SMSF to ensure compliance with regulations and to develop an appropriate investment strategy.
Developing an Investment Strategy
An investment strategy outlines the investment goals and objectives of the SMSF. It is essential to develop an appropriate investment strategy that aligns with your goals and risk tolerance. The investment strategy should also consider the diversification of investments to mitigate risk and ensure the long-term sustainability of the SMSF.
Conducting Due Diligence
Conducting due diligence is an essential step when considering buying property with your SMSF. This involves researching the property, including its location, potential rental income, and any potential risks associated with the investment. It is essential to seek professional advice when conducting
Applying for an SMSF Property Loan
If you don’t have enough cash in your SMSF to purchase the property outright, you may need to apply for an SMSF property loan.
Making the Purchase
Once you have obtained finance and conducted due diligence, you can make an offer to purchase the property.
Living in your SMSF Property
Overview of SMSF Property Rules
There are strict rules around living in an SMSF property, including:
– The property must be used solely for investment purposes until retirement.
– Members of the SMSF are not allowed to use the property for personal use until retirement.
– The property cannot be rented to a member of the SMSF or a related party.
Options for Living in Your SMSF Property
After you meet a ‘condition of release’ (generally retire or reach preservation age), you may be able to live in your SMSF property. To live in your SMSF property after you retire, you’ll need to follow specific rules and regulations and it’s essential to seek professional advice to ensure that you’re following the correct procedures and meeting all legal requirements.
Selling your SMSF Property
Selling property from your SMSF can be a complex process that requires careful consideration. It’s important to understand the restrictions and alternative options for exiting your SMSF property, as well as the tax implications of selling property from your SMSF.
Restrictions on Selling to Yourself
One of the most important restrictions to consider is the prohibition on buying or selling assets between yourself and your SMSF. This means that you cannot sell your SMSF property to yourself or purchase it from your SMSF. However, there are alternative options for exiting your SMSF property.
Tax Implications of Selling Property from Your SMSF
When selling property from your SMSF, it’s important to understand the tax implications. Any capital gains made on the sale will be subject to capital gains tax. The tax rate will depend on a variety of factors, such as the length of time you held the property and your current phase within your SMSF. It’s always recommended to seek professional advice when considering selling property from your SMSF.
Establishing an SMSF Loan
SMSFs can borrow to invest in property, but the loan must be used solely to purchase a single asset, such as a residential or commercial property. The property must also be held in a separate trust.
SMSF loans (also known as a Limited Recourse Borrowing Arrangement – LRBA) can be complex and it’s best to seek advice from a specialist on your options and obligations.
Property investments inside an SMSF can be a great way to build your retirement savings but they are not for everyone. There is complexity involved and like all matters when dealing with an SMSF, you require an understanding and education around the do’s and don’ts. There are also significant penalties imposed on the fund, and possibly the trustees, if legislative requirements are not met.
As always, seeking professional advice from an SMSF Specialist adviser is essential when looking at your options. Collective Wealth Advisers are SMSF Specialist advisers and have a deep understanding of the processes and responsibilities involved in SMSF management.
Contact us to arrange a meeting to discuss your SMSF objectives.