Exploring the potential of buying vacant land with your SMSF can open up avenues for strategic investment. While the option exists to secure vacant land through SMSF loans, it’s essential to understand the limitations and regulations that accompany such investments to ensure you’re maximising the potential of your SMSF investments within legal boundaries.
Can I buy vacant land with an SMSF loan?
Yes! If your trust deed allows for it, you are able to purchase vacant land with an SMSF loan. However, it’s important to ask yourself what you’re planning to do with the vacant land, as the options for SMSFs are limited.
If you’re looking to buy land to hold and sell for a capital gain, legally, this is allowed. But if you’re hoping to purchase land and build on it at a future date, unfortunately, this is not allowed. This is because of the single acquirable asset rule — with a limited recourse borrowing arrangement (LRBA), otherwise known as an SMSF loan, the fund can only purchase a ‘single acquirable asset’.
Superannuation law allows SMSFs to borrow funds to purchase investments on the condition that a single asset is acquired. This means purchasing land and then borrowing to build a house is not allowed due to the nature of the finance contracts — the loan contracts come in two parts: one for the land and one for the construction.
Additionally, you are prohibited from using borrowed funds to enhance a single acquired asset. This includes making repairs, altering the structure of a home, or demolishing a home for reconstruction.
Interestingly, existing cash within your SMSF can be used to improve your financed SMSF asset (in this case, land), however, these enhancements are not allowed to transform the asset into a different type of asset (for example, transforming land into property).
Simply put, yes, you can buy vacant land with an SMSF loan, however, you can not legally build a home on it in the future.
Can I use an SMSF loan to build a house on vacant land that my SMSF owns?
An SMSF trustee is not permitted to borrow under an LRBA to build a house on or develop vacant land owned by the fund. Existing SMSF assets cannot be added to an LRBA. Placing a charge over an existing asset of the fund, such as vacant land, would typically violate superannuation laws.
Can I use an SMSF loan to purchase a house and land package?
When it comes to borrowing to purchase an asset, the single acquirable asset rule that we mentioned above means house and land packages have typically been out of the question for SMSFs. The nature of the contracts essentially makes house and land two separate contracts, and not a single asset. However, at SMSF Loan Experts, we solve the single acquirable asset rule by entering into a two-part contract to purchase the land and engage your builder on your behalf, while you enter into a one-part contract with us.
Learn more about how to legally purchase a house and land package with your SMSF.
Ready to explore your options for investing in property within your SMSF? Contact SMSF Loan Experts today to discover how we can assist you in making informed decisions regarding SMSF loans.
