Can I buy an investment property through my SMSF – Self Managed Super Fund? This is one of the most common questions that our clients ask us. The answer is yes, but there are many things to consider so getting a consultation with a SMSF specialist, like iCare Super, is recommended to ensure you understand every aspect of this process.
The benefits of using SMSF to invest in property include:
- The SMSF can borrow to acquire a property more than its available funds
- The rental income will be taxed at the concessional rate (15%) when the SMSF is accumulating, and the tax is nil if the SMSF is in pension phase.
- No tax to pay on the capital growth when you sell the property if the SMSF is in a full pension phase. SMSF only pays 10% capital gain tax if it is an accumulation phase.
This is a huge tax saving!
- SMSF can fund the mortgage payment not only by rental income but the SMSF investment earnings, employer contributions and member contributions. For some people, gearing via superannuation may be the only way they can afford to invest into direct property.
What properties can a SMSF buy?
A SMSF can buy any sort of properties, however residential property must be an arm’s length transaction from an unrelated party. As to the commercial property, there is no restriction on whether you buy from a related party or unrelated party.
Can a SMSF borrow to purchase Properties?
Superannuation Industry Supervision (SIS) now allows SMSFs to borrow to purchase real estate. This can be achieved by a limited recourse borrowing agreement between SMSF and banks or related parties. In the event of a loan default by SMSF, the lender only has recourse to the security property and cannot claim any other SMSF assets.
The rules do not prohibit the lender from being a related party. Therefore you and other members can lend money to your own SMSF to enable the purchases to be made. The major lenders in Australia also are offering a range of loan products to SMSFs for investing in property.
How does a SMSF invests in property through a limited recourse borrowing agreement?
- Check the trust deed to ensure it allows borrowing. If not, you need to update your SMSF deed.
- Any investment in property must be consistent with your SMSF investment strategy.
- Establish the custodian trust and the property is held in trust for the SMSF which is entitled to its income.
- Buy the property you like or transfer your own commercial property to your SMSF
- All rents are paid direct to the SMSF. Loan repayments are made in the ordinary way from the SMSF.
- When the mortgage is paid out in full, title to the property can be transferred to the SMSF
Beware that you cannot rent residential property from your own SMSF; however in some circumstances you will be able to rent a commercial property if it is for business purposes. The rent will have to be at a market rate and the premises will need to be for running your business.
At iCare Super, we have the right resources in place to assist you to apply for the loan to buy the property in your SMSF.
Please contact us if you have any enquiries.