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 rules are not as strict for commercial properties.
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.
The merits of investing in property often rely on the ability to negatively gear, however, the function of an SMSF can make negative gearing an unfeasible option. Here’s why…
Buying property in person | Buying property through SMSF |
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While Prisha was able to take advantage of the lower capital gains tax, it was a once-off advantage. Matt was able to benefit from a much lower mortgage rate for the lifetime of his loan, and better negative gearing opportunities. He also avoided the costs of setting up and managing an SMSF, all of which ate into the returns from Prisha’s SMSF each year.
These are hypothetical examples and should not be relied upon when making an investment decision.
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.
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
Call: 1300 789 932
Call: 1300 348 546
Call: 1300 734 479
Call: 1300 361 784
Call: 1800 005 166
Call: 1300 664 781
Call: 1800 222 071
Call: 1300 360 988
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