If you chose to set up an SMSF as your retirement option, I have good news for you! The rules governing SMSF funds allow you to invest in all types of property, including residential, commercial, industrial and in some cases even a farm. Isn’t that great? But before you go and spend your savings, make sure you fully understand all the rules and regulations applying to SMSF property investment.
Ever since the SMSF first appeared, the trustees were always able to buy property through it. However, in recent years this has been made a lot easier thanks to the changes in the SMSF rules. Now, people are allowed to invest in properties they previously couldn’t afford by taking a loan from a bank. Banks can borrow up to 70-80 percent to pay off the self managed super funds property. To repay the loan you can use tax-deductible personal contributions, compulsory super guarantee payments and salary sacrifice contributions, as well as any rent the fund might receive from the property. Consider consulting an SMSF investment expert to help you understand the total costs.
Besides calculating the cost of investing in property, it’s also important to properly determine its value. After all, it’s called an investment which means it should result in significant returns in order to be successful. A good investment can yield even more returns if the property is held for longer than a year. After the first year, there’s a 1/3 discount on the capital gain made through a sale. And if the property is held on until the members reach the retirement phase – the fund will no longer pay tax on capital gain or rental income when the members decide to sell.
After calculating the total costs, the risks and benefits, know that your self managed super funds property must:
- pass the sole purpose test which means that it needs to have the sole purpose to provide retirement benefits to the fund’s members;
- not be bought from a member or any related party of a member;
- not be inhabited by a fund member or any related party of a member;
- not be rented by a fund member or any related party of a member.
Buying property through an SMSF can be of great benefit for small-business owners because the SMSF laws allow them to use the property as their business premises. However, this does not mean running a business completely rent-free or at a discount. The rules say there must be rent paid to the SMSF at a market value. When it comes to using the property as a holiday home or for other recreational purposes, the laws strongly forbid it. The high penalties that come with it definitely make it not worth the try.