Buying Property through a Self Managed Superannuation Fund (SMSF)
Using a Self Managed Superannuation Fund (SMSF) to buy property is becoming more and more popular, but one needs to consider a variety of factors before jumping in.
We have recently established SMSFs for several clients who are using them to own property used in their businesses. This is a relatively simple process. The business pays rent to the SMSF and the SMSF uses that rent plus regular contributions to pay off loans that were established to fund the purchase. The SMSF is able to accumulate increasing equity in the properties, establish other non-property investment portfolios with excess cash and accumulate significant wealth to fund the clients’ ultimate retirement.
If the client already owned the property, they can use the cash received from the sale of the property to the SMSF to pay off private loans, effectively replacing private debt with tax deductible debt.
Other clients are using SMSFs to set up a portfolio of residential properties, using their existing superannuation balances to fund the deposits.
These structures are very tax efficient, but do come with restrictions and cost, so personal advice is essential before going ahead. You should be aware of the restrictions on the rules relating to SMSFs to ensure you don’t breach legislation and incur substantial penalties. We understand these rules and guide you along the way.
Geared SMSF property risks include:
- Higher costs – SMSF property loans tend to be more costly than other property loans which must be factored into your investment decision.
- Cash flow – Loan repayments must be made from your SMSF which means your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
- Hard to cancel – If your SMSF property loan documentation and contract is not set up correctly unwinding the arrangement may not be allowed and you may be required to sell the property, potentially causing substantial losses to the SMSF.
- Possible tax losses – Any tax losses from the property cannot be offset against your taxable income outside the fund.
- No alterations to the property – Until the SMSF property loan is paid off alterations to a property cannot be made if they change the character of the property.
Be cautious if someone related to the property you are planning to purchase offers to arrange your loan as sometimes unscrupulous advisers work in groups and recommend each other’s services.
If you need help setting up your Self Managed Super Fund (SMSF) or would like to consider these tax efficient ideas, give us a call to make an appointment to investigate your options.
Call Us NOW: 02 60332233