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Reasons To Consider Using Your SMSF to Buy Property

Reasons To Consider Using Your SMSF to Buy Property

By Yannick Ieko

One of the benefits of having your own self-managed super fund (SMSF) is the ability to buy residential or commercial property. Unavailable in an industry or retail fund, an SMSF is the only type of super fund in Australia that allows you to invest directly in property.

Read on to find out the benefits of investing in property via your SMSF, as well as the associated legal compliance regulations. 

The benefits of using your SMSF to buy property 

  • • Property can help you to diversify your SMSF investment portfolio. It brings a different asset class to your portfolio with different types of property to invest across.
  • • Australian property prices have a long-term growth trend, even if there are periods when prices stagnate or decline.
  • • You can pay off SMSF property loans using before-tax dollars (income tax).
  • • You can claim any property expenses as tax deductions to reduce the amount of tax your SMSF pays. Examples of tax-deductible property expenses include loan interest, council rates, property manager fees, and repairs and maintenance expenses.
  • • You can use tenant rental income to help you make your SMSF loan repayments.

Legal compliance regulations for buying SMSF property

Any property that you buy through your SMSF must:

  • • Be for the sole purpose of providing for the retirement of you and any other members of your SMSF.
  • • Not be obtained from (or even used by) any member of your SMSF or their family if it is a residential property.
  • • Be an Australian property.

If you are buying commercial property, you can lease it back for your own business (or one of your other fund member’s businesses), provided that:

  • • You pay a commercial (market) rate of rent.
  • • You get the property regularly (and independently) valued.

How to buy SMSF property

If you need to borrow to buy your SMSF property, you must take out a loan under a limited recourse borrowing arrangement. Essentially, the property you buy will be held in a separate trust, known as a bare trust. This protects the rest of your SMSF assets from a lender claim if you ever default on your repayments in the future. 

The SMSF loan repayments must be made from your fund, and the rental income that your property generates is paid into the fund’s bank account. This income can be used to help fund some or all of the loan repayments.

It’s important to get advice from an SMSF property loan specialist before you borrow to invest in property via your SMSF. This will ensure your legal compliance. Avoid using a general lender who may not be as familiar with the compliance obligations. You are legally responsible for ensuring your fund’s compliance with all of Australia’s superannuation legislation, not lenders.

If it is consistent with your SMSF investment strategy, buying property with your SMSF might be the right choice for you. To learn more about investing in property through your SMSF, please contact us today.