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Property Investment with your Self-Managed Super Fund
Property investment is a popular strategy for those with a Self-Managed Super Fund (SMSF), and can provide a way into the market that one may struggle to get into using more traditional means. In amongst the hype surrounding SMSF property investment are a number of considerations to make, things to be wary of and how much you should have ready to go before you take the first steps.
Balances and Borrowing
The general consensus is that your fund will need $200,000 before most of the financial institutions will lend to the fund. Borrowing to buy property in superannuation isn’t something new, in fact the rules were introduced on this in September 2007. Borrowing within a SMSF can be incredibly cost effective and tax advantageous, but there are tricks and traps.
Getting the documentation right from the outset ensures the transaction complies and will save nasty surprises down the track. Something as simple as the correct wording on the offer and acceptance can cause major headaches. There are also limitations on improvements, as the fund cannot borrow to improve the property but can borrow to repair the property, while another kicker is that the property cannot be subdivided before the loan is repaid.
Tax Implications
Is it really that tax effective? Absolutely. For an individual earning $77,000 per year and then receives $10,000 rent, they pay $3,450 tax on the rent leaving $6,550 in hand. That same $10,000 rent in the SMSF pays $1,500 tax leaving $8,500. Where the property has been held for longer than 12 months the capital gains tax is reduced from 15% to 10%. Once trustees commence superannuation pensions for the members the capital gains tax can often be reduced to 0%.
Residential vs Commercial
A lot of superannuation funds invest in both commercial and residential real estate, and often for very different reasons, but by far the most common reason to investment in property is to operate your business from that property. The current legislative landscape allows SMSF’s to buy commercial real estate and operate their business from that same property, the fund can even buy the property from the members of the fund. In stark comparison SMSF’s cannot lease residential property to the members and relatives and you certainly cannot acquire residential real estate from the members or relatives. There may also be generous capital gains tax concessions available when commercial property is acquired from the members.
Be aware of the markets – both short and long term
Generally speaking, property investors get into the market to ultimately turn a profit. The property market can show a short-term upturn, appealing to prospective investors, but then turn around within a few years and turn into a less than stellar investment. Similarly, buying a property in a market that looks average right now could become a lucrative investment within a relatively short amount of time. As such, it is crucial that you understand the market into which you are entering, and consult with relevant data and property specialists to get the best insight into the long-term forecasts for the market you’re looking at. After all, property investment is a long-term game, so be sure you’ve given yourself the best shot at success by looking beyond the immediate future.
Watch out for potential hazards
Other than the aforementioned lack of long-term thinking, there are a few notable hazards to consider when looking at using your SMSF to invest in property. A major one is that the risk you take getting into property investment extends to your retirement fund. As the larger point of a super fund is to provide you with money once you cease working, massive losses in property investment can reduce the amount you have left in your SMSF.
Wrapping your head around the intricacies of Self-Managed Super Funds and how they can help you invest in property can be confusing. For more information or to arrange a consultation, contact McKinley Plowman today on 9301 2200 or visit www.mckinleyplowman.com.au.
References
https://www.nestegg.com.au/investment-insights/11637-our-super-system-smsfs-and-property
written by:
McKinley Plowman
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