Property investment with a Self-Managed Super Fund (SMSF)

Property is growing a popular investment class for SMSFs. Like all investment options, this choice has its own pros and cons.

 

Although property is an increasingly popular class of asset in which to invest, for many using SMSF enticed by the appeal of a physical asset, its not as simple as buy, set and forget.

 

Its vital that the investors looking to gain returns from this asset class do so legitimately and successfully by first weighing up the pros and cons.

 

One of the key benefits to owning a SMSF is the capability to use the funds to invest in real estate/property. Property investment has for decades has been a key driver for wealth in Australia and is a plank to develop a varied investment portfolio.

 

Property is also considered by many as a relatively safe investment option, given that this it’s a physical asset that will always been in demand and is also much less of an unpredictable asset class than shares.

 

Different from other types of investment, property has the potential to provide two sources of revenue to drive growth in your retirement savings/fund. Rental returns can provide an constant source of cash flow and can be used to fund other investment properties, while negatively geared properties can provide tax breaks across the SMSF earnings.

 

The second revenue stream is from realising capital growth in the property once it is sold. While still subject to tax, properties held long-term by an SMSF can yield hefty returns that may not be matched by other investment classes.

 

There are precise regulations in place for the purchase of property with an SMSF. Most these restrictions relate to occupation for residential properties.

 

As with all superannuation-funded investments, properties can only be used for purposes of investment. SMSF-owned residences cannot, for instance, be occupied or rented by any of the SMSF’s trustees or parties relating to them, nor can a property established as a holiday home be used by any trustee or family member.

 

Though, these occupation limitations are largely unique to residential properties. Commercial properties are treated in a different way and can in fact be owned by an SMSF and tenanted to a business operated by a trustee or family member. As such, there are decisions of not just whether to invest in property, but which type of property to examine.

 

How you fund the property will depend on how much your SMSF has accessible to invest. If there is sufficient cash available, the fund can purchase the property outright.

 

Things are less straightforward when a loan is required to fund part of the property.

Unlike the purchase of an owner-occupied property with the assistance of a mortgage, using an SMSF to fund a property acquisition requires a particular loan agreement known as a limited recourse borrowing arrangement. This facility places certain restrictions on the use of borrowed funds, such as that loans can only be used to purchase and preserve a property and not to carry out enhancements.

ASIC points out that tax offsets can only be used against the fund’s earnings, not your own personal income, and that enough cash needs to be available within the fund to service loan repayments and ongoing property maintenance expenses.

While there are many benefits to using an SMSF to invest in property, care must be given to observing the strict regulations in place to ensure the investment endures. Be sure to investigate all types of property in which to invest to achieve the greatest returns for your superannuation.

For further information, contact Tim and team today - (02) 6684 7096

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