SMSF Property Investment

Can you buy property with an SMSF?

It is generally fine to include an investment property in your SMSF portfolio, and that property can be commercial or residential. It is important to note that any property in an SMSF is owned by the fund, not the individual members and so there are three important limitations on residential property in an SMSF.

The SMSF must not buy a residential property from a trustee, a relative or another party related to trustees or members unless it does so at market rates;
It can’t be lived in by a trustee, a relative, or another related party except in exceptional circumstances; and
It cannot be used as a holiday home by trustees, relatives, or other related parties except where market rates are paid and usually not in peak holiday periods.

The rules are not as strict for commercial properties.

Is SMSF property investment worth it?

It really depends on the SMSF’s investment strategy and other holdings in its portfolio. However, it must be remembered that someone’s personal investment strategy and SMSF strategy can differ greatly. This is generally due to the effects of negative gearing.

Personal investment portfolios often use negative gearing on borrowings and losses to offset income and capital gains tax. However, SMSFs are only taxed at 15%, much lower than most income tax rates, so the investment strategy is to make a profit and negative gearing is not relevant to SMSFs.

Remember, you can’t offset any SMSF losses against your personal tax.

What’s more, holding an investment property can actually increase the running costs of your SMSF.

Negative gearing: SMSF vs personal investment

The merits of investing in property often rely on the ability to negatively gear, however, property investment through an SMSF can make negative gearing a less attractive option as an SMSF cannot use other SMSF assets as security which often impacts the cost of the loan. It is also important to note that it is the trustees obligation to make investments which are in the members best interests and will grow.

Negative gearing strategies are associated with loss, at least in the short and medium term. Whilst there are benefits such as a lower capital gains tax rate on the sale of investment property by an SMSF, advice should be sought to ensure the use of negative gearing will be in the long-term benefits of members of the fund.

Can I purchase a property from my SMSF?

If you stick to the rules, yes. One important rule is that SMSF trustees must abide by the sole purpose test and act in the best interests of the members. If the SMSF sells a property to one of its members, the sale must be in the best interest of the member’s retirement objectives, so a normal market price needs to be paid. It should be noted that unless the house is worth less than 5% of the assets of the fund it is not possible to rent a property to a member of the fund or a relative of a member of the fund as it is deemed an in-house asset.

Can I use my super as a deposit to buy a house

If you’re a first home buyer, you might be able to use part of your super to help buy a house through the federal government’s First Home Super Saver Scheme – regardless of whether your super is in an SMSF or a regular super fund.

References
SMSF property investment - Moneysmart