As SMSF advisors, we often get asked: "Can I buy residential property with a self-managed super fund?" and the answer is yes. While an SMSF is the only way you can use your superannuation benefits to directly invest in residential property, there are some important rules you need to know before you sign on the dotted line.
There's a bit to understand when it comes to SMSF borrowing and investments, so we created this article to take you through the different ways you can use your SMSF to purchase residential property and the rules you need to follow before deciding if this is the right SMSF investment strategy for you.
Why Put Residential Property Through an SMSF?
First off, let’s look at a few reasons why someone would want to invest in property with their SMSF:
Pay Less Tax on Rental Income
Superannuation income is generally taxed at 15% while you’re in the accumulation phase and then can be reduced to 0% tax when you are in pension phase. This is likely to be significantly lower than your personal income tax rate.
Save on Capital Gains Tax
The concessional tax rates apply to both the rental income as well as any capital gains resulting from the sale of the property. For example when in accumulation phase, selling a property held in an SMSF for more than 12 months qualifies for 1/3rd discount, which generally means tax on gains is 10%. The tax can be reduced to 0% when you are in full pension phase.
How To Buy Residential Property Through Your SMSF
The simplest way to acquire an investment property through your self-managed super fund is to pay in cash and buy the property outright. But if you don’t have a pile of cash sitting in your SMSF, there are some other ways to make it happen.
Acquire Property With Tenants in Common
The ATO allows an SMSF to purchase a residential property as ‘tenants in common’ with individuals or other unrelated parties. There’s flexibility around ownership percentages among the parties, although the property must remain unencumbered, which means neither party can use the equity in the property.
Finance Property Via a Limited Recourse Borrowing Arrangement
A Limited Recourse Borrowing Arrangement (LRBA) is when an SMSF trustee takes out a loan from a third-party lender. The trustee uses the borrowed funds to purchase a single asset (or collection of identical assets that have the same market value) to be held in a separate trust. It’s crucial that before you sign a contract to purchase that perfect property, you speak to a mortgage broker to check if your SMSF will meet the lender's servicing requirements.
Transfer an Existing Asset to Your SMSF
You can’t transfer residential property that you own into your SMSF (unless that property is considered business real property), but if you own commercial property, discover how your SMSF may be able to acquire it from you.
Lease Residential Property Through Your SMSF
Like with residential property acquisitions, residential property leasing can’t involve a related party of the SMSF at any time. For example, your SMSF purchased a beach house that is rented out on Airbnb and you’ve invited the whole crew down for the weekend. Sorry to ruin your grand plans, but no related party can stay there (even if they paid market rates for the stay). This is because the property would fail the sole purpose test, which states that the fund needs to be maintained for the sole purpose of providing retirement benefits to its members, as opposed to present-day benefits. You can, however, lease a residential property to an unrelated party.
SMSF Property Acquisition Rules Were Not Made To Be Broken
We’ve established that residential property acquisitions are permitted; however, your SMSF can’t purchase the property from a related party of the fund. The ATO describes related parties as members of the fund, their relatives and their associates. This rule applies so that no one associated with your SMSF can get a present-day benefit from its investments. If you’re buying a property from someone you know, check if they’re a related party as per the ATO’s guidelines, before you sign a contract.
SMSF Investment Strategy
It is important to review your SMSF’s investment strategy to ensure any investment decision is in line with your retirement strategy.
Nobody Said SMSF Property Investment Was Easy
There are a lot of factors that need to be considered to determine if any of the options above suit your personal circumstances. That’s where we come in. BlueRock provides a multidisciplinary service that will help you determine the most appropriate and pain-free approach to owning property, whether through your SMSF or another financial strategy. If you’d like to find out if an SMSF is the right vehicle for owning property based on your goals, please get in touch with one of our SMSF Specialists.
Disclaimer
This article was written for educational purposes only and should not be relied upon for advice. We highly recommend you speak with a Financial advisor & SMSF Specialist prior to making any investment decisions.
