Rands Tax & Business Consultants

Tips when using your SMSF to invest in Property

Buying property through SMSF is very popular among property investors.

An Australian could use his/her super fund to invest in a property as a retirement plan. You can also borrow up to 80% of the value of the property.

It is noteworthy to mention when you reach your retirement age, the funds accumulated in the SMSF will be converted to a pension fund. In a pension fund, rental income and capital gains are tax-free, and therefore when you sell the property after your retirement, the capital gain is tax-free.

You can either buy a residential investment property or commercial property under your SMSF.

Residential property under SMSF

You need to have a super balance between $150,000 and $200,000. You or any related parties to you cannot live on the property. You can sell a property that is currently owned by you to SMSF or you cannot buy the property from SMSF.

Buying a commercial property under SMSF

In contracts to the residential investment property, the SMSF can buy the property owned by you, SMSF trustees/ beneficiaries. You can also rent the commercial property owned by SMSF to your business. The transaction should be implemented at the market rates.

This is a popular business strategy implemented by many business owners.

The tax consequence of buying property in SMSF

Before reaching your retirement age, the property will be held under the accumulation fund. At this stage, the property rental income is taxed @15% after deducting property deductions. As in any investment in residential property, the bank interest is fully deductible and any loss after deductions can be carried forward to future years.

If the property is held for more than 12 months, the capital gain will be taxed at 10%. However after your retirement and the property is converted to the pension fund, and any income from the property in retirement is completely tax-free.

Borrowing to buy property in your SMSF

SMSF members are the SMSF Trustees. Using SMSF, you can buy property by borrowing up to 80% of the property value, this can be achieved by Limited recourse borrowing arrangements, in other words, LRBA.

Under this arrangement, a separate bare/property trust is created under the SMSF to hold the property whereas the lender only has recourse to this property. The benefit of the LRBA is that the lender will not have the access to other SMSF assets or the trustees’ personal assets in the event of a default.

Do you need help in setting up an SMSF and borrowing under your SMSF to purchase an investment property? Contact Rands Financial Services. We are Accountants specialising in the management of SMSF and also Sally Pietersz – Mortgage Broker is specialised SMSF loans.

We offer virtual consultations and you can get the Right Solution at the comfort of your home or office.

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