Buy property by SMSF
Hearing from others that they've utilised their superannuation money to buy a property could leave you feeling like you are missing out on some property market 'magic trick'. So how does it function?
Moving money from industry or retail superannuation plans that manage your investments for you into a self-managed super fund (SMSF), which gives you the freedom to determine how your assets are invested, is one of the more popular ways people are managing their superannuation.
This option is reserved for a select few because managing your superannuation in this way may be costly, time-consuming, and hands-on. It is your responsibility to ensure that your investments abide by applicable tax and superannuation legislation.
How it works
You can borrow money through SMSF loans and combine your existing superannuation savings with it to buy an investment property. This could be a residential property (a house or an apartment) or a business location (e.g. warehouse or office space).
The ATO imposes a stringent checklist of requirements to ascertain whether a particular property is eligible and whether the purchase transaction can be completed in compliance when deciding what kind of property to buy and who you plan to rent it to.
It's crucial to keep in mind that your SMSF must pass the single purpose test in order to qualify for super fund tax breaks, which means it can only be used to provide members with retirement benefits. According to the ATO, there may be both civil and criminal
SMSF lending
You can obtain the ideal loan to suit your needs with the help of a professional because not all lenders provide products appropriate for SMSF lending. When compared to other types of residential house loans, SMSF loans might have significantly higher interest rates and application fees.
The loan offered falls under the category of restricted recourse borrowing arrangements (LRBA). By shielding additional assets owned by the SMSF from the lender in the event of a loan failure, an LRBA protects the SMSF as a whole.
Costs to consider
- Establishment costs – the initial costs of setting up all of the required legal entities, purchasing the property, and applying for a home loan can be expensive and need to be considered.
- Ongoing cash flow – you must have enough cash flowing into your SMSF to cover ongoing expenses like loan repayments and other property costs, including insurance, council rates and property management.
- Paying out the loan – once the home loan has been paid off in full (up to 30 years after the property purchase, depending on the loan term), the legal title of the property needs to be transferred out of the holding trust (known as a Bare Trust) and into the SMSF, which may result in government taxes like stamp duty being payable (again), as it is classified as a sale of the property.
Once you have established your dream team, it’s time to set up the required SMSF entities. Then you can crunch the numbers and apply for home loan pre-approval (so you know how much you can spend on a property). Then it’s time to go shopping.
- So, you understand how it works and have decided you would like to explore your options. The first step is to build a team to guide you through the process.
- It would be best if you had some or all of the following:
- An accountant to crunch the numbers and ensure tax laws are considered;
- A financial planner to create a holistic investment strategy for your financial future. They’ll take into consideration your overall financial needs and objectives;
- A legal professional to create the required legal entities and to navigate the legalities for you;
- A mortgage professional to guide you to the right SMSF lender’s product for your needs. They are also invaluable team members in helping you to successfully complete the application process through to the settlement of your new property and beyond.
Dotcom Property Sales doesn’t give any financial & legal advice and you should always consider seeking independent legal, financial, taxation or other advice to check how the website information relates to your unique circumstances.
