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What to consider before setting up an SMSF to invest in property


Did you know you can buy property through your SMSF? Sounds appealing, right?  With possible tax concessions and other incentives, more and more Australians are looking at ways to diversify their SMSF portfolio with property.

But there are risks involved that you need to be aware of. Here’s what you should know.

1.  There are lots of rules to remain compliant

Purchasing a property through your SMSF is possible, but it needs to tick a fair few boxes to remain legal.

To remain compliant the property must:

  • Meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
  • Not be acquired from a related party of a member
  • Not be lived in by a fund member or any fund members’ related parties
  • Not be rented by a fund member or any fund members’ related parties.

If the property you’re looking at purchasing does meet these requirements, but you’re still unsure if it’s the right strategy for you, we recommend speaking to an independent financial advisor before making any costly decisions.

2. It can be expensive

Purchasing a property through your SMSF involves fees and charges that add up, eroding your nest egg very fast.

The costs of purchasing and managing property include:

  • Upfront fees
  • Legal fees
  • Advice fees
  • Stamp duty
  • Ongoing property management fees
  • Bank fees

Always get upfront quotes so you have a thorough understanding of the fees and charges involved before making a commitment. Seek independent advice as much as possible rather than always going off referrals from other service providers.  Be aware that kickbacks and incentives might be arranged between parties without you being privy.

3. Limited recourse borrowing arrangements

A limited recourse borrowing arrangement (LRBA) involves an SMSF trustee taking out a loan from a third-party lender.  The trustee then uses those funds to purchase a single asset – like a residential or commercial property, or collection of identical assets that have the same market value – to be held in a separate trust.

But there are some risks to consider with LRBAs, including:

  • Higher costs – Property loans for SMSFs are generally more expensive than other property loans, so it might cost you more over the long term.
  • Cash flow – Loan repayments must be made from your SMSF which means your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
  • Hard to cancel – If your SMSF property loan documentation and contract is not set up correctly, unwinding the arrangement may not be allowed.  You may be forced to sell the property, potentially causing substantial losses to the SMSF.
  • Possible tax losses – Any tax losses from the property cannot be offset against your taxable income outside the fund.
  • No alterations to the property – Until the SMSF property loan is paid off, alterations to a property cannot be made if they change the character of the property.

There’s no denying SMSFs are becoming more and more popular.  However knowing how to manage your fund and find the right strategy for you requires serious manpower and insider knowledge of the superannuation landscape. For this reason, we always recommend seeking the help of an independent financial advisor.  That way you can take back control of your super while staying compliant at the same time.


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