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Self-Managed Super Fund (SMSF) solution.
Can I buy a property through my self managed super fund (SMSF)?
Yes you can, although there are a variety of restrictions and considerations before buying property through a self managed super fund.
Self managed super funds buying property guidelines do change and we would advise that you speak with one of our self managed super fund specialist financial planners to ensure you have the most up to date information. Since the changes to the Superannuation Industry Supervision (SIS) Act 1993 in September 2007 you can now borrow to invest in worthwhile assets which include real estate.
Self Managed Super Funds Buying Property
If you own a commercial property personally, provided that you or someone else operates a business out of those premises, this property could be transferred into your family superannuation fund. Ordinarily, a family superannuation fund cannot acquire residential property from the members. However, if you manage several residential properties and your activities constitute a business it may be possible to transfer the properties into a family superannuation fund. Call our team and see if your self managed super fund can buy property. See also borrowing in a self managed super fund.
Navigating Property Investments in a Self-Managed Super Fund: A Comprehensive Guide
Investing in property through a Self-Managed Super Fund (SMSF) has become increasingly popular among Australians. With the potential for tax advantages and a tangible asset as part of your superannuation, it’s a strategy that holds considerable appeal. This comprehensive guide explores the process, benefits, restrictions, and risks of purchasing property within an SMSF.
Understanding SMSFs and Property Investment
An SMSF provides its members, who are also its trustees, with control over their retirement savings. One of the major decisions trustees make is where to invest these funds. While options like shares, term deposits, and managed funds are common, investing in property has gained significant interest.
Key Steps to Buying Property with an SMSF
1. Set Up Your SMSF
The first step is to set up your SMSF, ensuring compliance with the Australian Taxation Office (ATO) regulations. Your fund should have a clear, articulated investment strategy, outlining the objectives and types of investments appropriate for your fund.
2. Organise Your Finances
Before purchasing a property, you need to ensure your SMSF has sufficient funds to cover the purchase and ongoing costs. Your SMSF can borrow money to invest in property using a limited recourse borrowing arrangement (LRBA).
3. Select Your Property
The property selection is crucial. The investment must comply with the Superannuation Industry (Supervision) Act 1993 which is regulated by the ATO, meaning it should solely provide retirement benefits for the fund members.
4. Purchase the Property
Once you’ve identified a suitable property, your SMSF can purchase it. Legal ownership of the property is held in a separate trust (bare trust) until the loan is fully repaid if you’re using an LRBA.
Restrictions and Risks
While buying a property through an SMSF can offer advantages, it’s critical to be aware of restrictions set by the ATO:
- The Sole Purpose Test: The property must be purchased solely to provide retirement benefits for fund members.
- Property Use: Fund members and related parties cannot live in the property or rent it.
- Limited Recourse Loan: If you borrow to buy a property, the loan must be a limited recourse loan, meaning the lender only has claims on the property, not other SMSF assets, if loan repayments aren’t met.
Potential risks include:
- Lack of Diversification: Investing a large proportion of your super in a single asset may limit your fund’s diversification.
- Property Market Volatility: Property values can go down, affecting the value of your SMSF.
- Liquidity Issues: Property is a non-liquid asset, which could pose problems when the fund needs to release cash, especially in the pension phase or if a member exits the fund.
Frequently Asked Questions
Q: Can my SMSF buy a residential property that I currently own?
A: No, your SMSF cannot purchase a residential property from a fund member or any related party due to the ‘in-house assets’ and ‘arm’s length’ rules.
Q: Can my SMSF buy commercial property?
A: Yes, an SMSF can invest in commercial property and can even lease it to a fund member or a related party, provided it’s leased at a market rate.
Q: What costs are involved in buying a property through an SMSF?
A: Costs include purchase price, conveyancing fees, stamp duty, property management fees, insurance, property maintenance costs, and loan repayments if the property is bought with borrowed funds.
Q: Can an SMSF buy overseas property?
A: While it’s technically possible for an SMSF to buy property overseas, it’s complex and carries significant compliance risks. It’s advisable to seek professional advice before proceeding.
CONCLUSION
Purchasing a property within an SMSF offers a unique opportunity to combine the benefits of property ownership with the tax efficiencies of superannuation. However, the process is not without its complexities, restrictions, and risks.
Due to the high stakes involved in managing your retirement savings and the legal implications of non-compliance, it’s crucial to seek expert advice from our SMSF Advisors when considering property investment in your SMSF.
