How Buying a Commercial or Residential Property Through Your SMSF Works
SMSFs and Property
You may want to set up an SMSF for the main purpose of investing in residential property. Please see below an explanation of when you can use your SMSF to invest and things you will need to consider prior to doing so.
SMSF Property Rules
You are only allowed to purchase property through your SMSF if the below rules are met. The property:
- Must meet the 'sole purpose test' of solely providing retirement benefits to fund members
- Must not be acquired from a related party of a member
- Must not be lived in by a fund member or any fund members' related parties
- Must not be rented by a fund member or any fund members' related parties.
SMSF Borrowing Costs
Buying a property via an SMSF may have various fees which will add up and reduce your super balance. Prior to making a decision, finding out the costs is a must.
- Upfront Fees
- Legal Fees
- Advice fees
- Stamp duty
- Ongoing Property Management Fees
- Bank Fees
SMSFs Borrowing & Leverage
In order to borrow or gear money from an SMSF into property a 'Limited Recourse Borrowing Agreement' is required. A LRBA has to be used to purchase a residential or commercial property. Prior to making this committment it must be assessed whether the investment is in line with the investment strategy and risk profile that the fund is operating under.
General SMSF property risks include:
- Cash Flow - The SMSF must have sufficient cash flow to service the loan repayments.
- Tax Implications - Tax Losses cannot be offset against taxable income outside fund.
- Property Alteration Restrictions - No character changing alterations to a property can be made until the SMSF property related loan has been paid off.
- Higher Borrowing Costs - SMSF related loans may have a higher interest rate or higher borrowing costs associated with them.
- Cancellation Risks - If the SMSF loan documentation or contract has not been correctly established, the ability to reverse the arrangement may be dissallowed and the property may need to be sold as a result, which has a possibility of causing severe losses to the SMSF.