Investing In Residential Property

Self Managed Super Funds (SMSF) can invest in residential real estate such as houses, units, townhouses and vacant land.

The main advantage of purchasing real estate is that it is easier for the trust to borrow money to buy these investments, thus magnifying its potential returns.

Can I use my SMSF to borrow?

Investment properties have always been a favourite investment for Australians.

However, it was previously difficult for a SMSF to finance the purchase because of restrictions on loans to SMSF trusts.

With these restrictions lifted, many people are now choosing to invest directly in property using their trust.

Are the SMSF assets protected?

A SMSF can now borrow on a limited recourse basis to purchase an investment property. This means that the bank only has recourse to fund’s investment property and not the other fund assets.

In the event that the there is a default on the loan, these other assets are protected from creditors.

What are the benefits of owning a property in a super fund?

Some of the benefits include:

  • Potential capital growth.
  • Diversification of your investment portfolio.
  • Easier asset class to understand.
  • Easier to gear than other assets.
  • Gearing of the asset can be funded with super contributions.
  • Low tax of 15% payable (or sometimes 0%) on the rent and capital gains.
  • The ability to choose the property that best suits your investment profile, compared to owning a property trust.

Risks of owning property in a SMSF

Whilst your assets are protected, there are still some disadvantages of borrowing with a SMSF.

Some of the downsides include:

  • Potential for increased costs (e.g. more land tax) through super fund ownership compared with personal ownership.
  • Upfront costs such as stamp duty.
  • Potential loss of fund diversification (if the fund is small).

Can I transfer property to my SMSF?

If the property is your residential property the super fund cannot buy it from you.

There is a specific rule against this to prevent members from transferring properties to their fund at less than or more than market value.

Can my SMSF rent the property to me?

Definitely not. You are not allowed to benefit in any way from the fund’s assets and are excluded from leasing this property from the fund.

Even if you pay more than market rent, it is still not allowable.

To find out more about Self Managed Super Funds please enquire online. We can give you the right advice to make sure that you comply with the regulations and rules for SMSFs.

How can I reduce my tax?

If the property is geared and makes a tax loss, you can use this to offset your other fund’s income. This is just one of the benefits of owning property in the fund.

If your employer is contributing to the fund, any loss from negatively gearing the property will reduce the funds taxable income and tax payable.

Additionally, a member who is drawing a pension may be able to gain a tax exemption on the income of the super fund. This includes rent and capital gains.

With proper tax and super planning a member can significantly reduce the tax on any property gains over time!

Can a SMSF claim building depreciation?

Yes, this is normally fine. A property surveyor can prepare a report detailing your allowable claims. This will reduce the taxable income of the fund and save you money!

Getting advice from a qualified tax agent will help ensure that you are aware of any tax exemptions that apply to your fund.

How can I increase my investment wealth?

We can help you take your property from purchase to re-sale, to achieve your investment goals and increase your wealth.

Take the following scenario:

  • A member has a self managed super fund and the fund borrows to purchase a property when they are 40.
  • Over the next few years the rental income less interest, expenses and building depreciation is negative and this loss reduces the tax payable on the contributions.
  • The member then retires at 60. At that time, the property is earning a rental profit which is tax free.
  • When the member reaches 80 years of age they decide to switch their investments to cash to pay their pensions. They sell the property tax free!

Getting expert help

Want help to set up a SMSF structure that will maximise your fund’s profitability? We are the specialists in helping people set up a SMSF trust.

Please enquire online today find out how we can help you with your situation.

Note: this website is for informational purposes only and should not be substituted for professional financial or taxation advice.