Investing in property through your SMSF can be a rewarding strategy – but it can also be confusing for newcomers, with plenty of complex rules to remember. To help you get started, we’ve put together answers to some of the most common questions new investors ask.
1. Can I use negative gearing through a SMSF?
Yes you can.
A SMSF can claim interest and borrowing expenses on an investment property in exactly the same way as an individual investor. So you can use negative gearing to help offset any tax on the fund’s other income now, then benefit from any capital gains on the property in the future. But remember, when you buy a property through your SMSF, you can only claim deductions for the fund, not for yourself.
2. How much can I borrow?
Banks will generally lend a little less to SMSFs than they might to an individual buyer, due to the extra risk that these loans carry given that they are non-recourse in nature. This means in the event that the SMSF defaults on the Loan the Lender can repossess or sell the Property only, but cannot repossess or sell any other SMSF asset to recoup any loan shortfall (if any). While different banks have different limits, a typical lender might let you borrow up to 80% of the property’s value if your SMSF trustee is a company, or up to 72% if the trustee is an individual.
3. Is it more expensive to buy property through super?
Generally speaking, it costs about the same amount to buy inside and outside super. If you don’t already have a SMSF, you will need to set one up, but that doesn’t have to be expensive.
4. Is investing in property through a SMSF tax effective?
Depending on your situation, buying property through a SMSF could offer significant tax benefits. Any rental income earned by your fund’s investment property is usually taxed at only 15%. And if you commence a Pension in the Fund after age 55, tax on rental income is tax free. More importantly if you commence a Pension in the Fund after age 55, tax on any capital gain is also tax free on the sale of the property! Of course, tax laws are complex, so you may wish to talk to a tax adviser before you invest as in some cases it may be more beneficial to purchase the Property in your personal name.
5. Can I use my SMSF to buy a holiday house?
No, you can’t.
All of your SMSF investments must be for the sole purpose of saving for retirement, so you can’t buy a property then use it for personal purposes.
6. Can I use my SMSF to buy my business premises?
Yes you can.
This is a special exception, and has proved a great strategy for many business owners. By buying a business property through your SMSF, then renting it back to your business at market rates, you can use your business rental costs to build your super.
7. Can my SMSF buy an investment property from me or my spouse?
No you can’t.
Your SMSF is not allowed to buy a residential property from a fund member or any person associated to a fund member such as a relative. So if you or another fund member already own a residential property, you can’t transfer it into your SMSF.
8. Can I rent my SMSF residential property to a family member?
No you can’t.
Again, this would contravene current Super Laws. That is you cannot rent residential property the SMSF owns to a fund member or any person associated to a fund member such as a relative.