Buying a house with your SMSF

People have been using their superannuation to buy property in their SMSF for a long time now, and it’s becoming increasingly popular, but, as with any big financial decision, it requires a lot of research and consideration.

Buying property with your super is a great way to invest for your retirement, but you need to ensure that it ties in with your overall investment strategy, and you should probably start thinking about it when you’re 15 – 25 years away from retirement.

Before you leap into purchasing a property with your SMSF there are a few questions you should ask yourself.

1. What sort of property should you buy?

2. What if you don’t have an SMSF?

3. Is it worth it to set up an SMSF to purchase property?

As with anything, there are advantages and disadvantages to purchasing a property with your SMSF, here are a few we think are important.

ADVANTAGES:

There are many benefits of purchasing a property in an SMSF, the big one being tax! Your super fund will tax you at 15% - which is considerably lower than most people’s personal tax rates.

It also allows you to combine your super balance with your partners. If your super balance and personal savings just won’t meet the deposit requirements, then you can combine your account balances with other members of your family to up your deposit! And If you can afford to save and have room within your concessional contribution limits then you can salary sacrifice additional income to your super to pay off the loan quicker! The best bit about this? It’s from pre-tax dollars!

Whether you purchase a residential or commercial property with your SMSF there are benefits to both! While you can’t live in a residential property you purchase if the property is sold during the accumulation phase, the capital gains tax calculates at a discounted rate and if the asset sells when the superannuation fund is in the pension phase, it’s tax-free!

Prefer a commercial property? Then you can actually lease it back to your own business, provided you are paying the current market rate for rent. This can not only provide stability to your business but can significantly help your cash flow.

DISADVANTAGES:

While there are a lot of advantages that come with purchasing a property through your SMSF, there are also a few disadvantages to think of!

Your initial set up costs will be higher and sometimes your fees will even be higher when getting a loan through your SMSF. It’s also not great if you’re used to negative gearing – when you negative gear your property through your SMSF the tax offset only applies to other income earned within the fund taxed at only 15% – not at your marginal tax rate on your regular income.

Another con? If you purchase a residential property, you cannot be linked to it…at all. This means no living in it and no renting it to anyone you are related to. The ATO has come out and said that one of the most common breaches of this is when people use their SMSF property as a personal holiday home or rent it to a family member.

When you purchase your property through an SMSF you need to be sure of your future cash flow. With higher deposits and the inability to borrow money to build or improve the property, you need to be certain that you’ll have enough cash to fund the property, as well as when you decide to retire completely. When your super moves into the pension phase, having enough money to fund that time is crucial to avoid a fire sale of the property. Pension payments can range from 4% of the pension member’s balance before 65 to 5% from 65-74 and upwards from there.

There are many things to consider when you’re thinking about investing in a SMSF, and the ATO provides the following guidance.

 Investments must be purchased on an ‘arm’s length’ basis and must be maintained on a strict commercial basis.

 The investment must meet the sole purpose test of providing retirement benefits to fund members.

This means that when you buy, sell or rent the property, it must be at the current market rate, and cannot be purchased, sold or leased to someone associated with any of the funds members.

Still interested in investing in your SMSF?

As with all financial decisions, it will depend on your personal circumstances and goals for the future. To equip yourself to make the best decision possible it is advisable to have a qualified, financial advisor have a look at the opportunity to give you their honest opinion.