How does an SMSF buy a property?

There are a lot of considerations about buying property as an investment and the complexities increase when the purchaser is an SMSF. Importantly with an SMSF, there are a number of protocols and structures to consider in the purchase process.

This article will look at different funding strategies for SMSFs to consider, pros and cons of direct ownership and the mechanics of an SMSF buying the property.

1. Different funding strategies for an SMSF buying a property

There are different funding strategies for an SMSF buying a property, including:

• Straight out with cash (pooled, rolled in, contributed)
• Co-own ‘tenants in common’ with a member (does not need to be 50/50)
• Part cash, part debt (SMSF borrows 65%–70% of the property)
• Purchase units in an ungeared unit trust (that in turn holds the property)
  • Insufficient funds alone in super
  • Looking to acquire land to develop or subdivide
  • Allows the transfer of units (ownership) across to the SMSF over time (rules apply)
• Indirectly – via managed fund, or listed property ETF (Jerome)
• Property Development in SMSF? – It is possible but there are rules!

Investors need to discuss all of the options available when considering property investment with a qualified and experienced planner not just rely on the opinion of so-called property ‘experts’.

2. There are pros and cons of direct property ownership

Here are some of the key points:

PROs

• Super helps as source of funding for a deposit
• It can be tax effective
  • 15% max on net rent
  • 10% on capital gains if sold >12 months
  • 0% on both in pension phase (if <$1.6M)
• Pay-off loan with pre-tax dollars (up to $25,000 p.a.)
• Business real property works well if a business owner (secure your premises, contribution caps don’t apply for market rent, free up borrowing facilities to use elsewhere for expanding the business)

CONs

• Super law restrictions – sole purpose test (no personal or related party use), hard to renovate if little cash (unable to use borrowed funds) etc
• Total Super Balance Caps – $1.6M
• Not optimal for negative gearing
• Higher set-up & ongoing costs
• Forced sale of asset (to meet minimum mandatory pension, member leaves etc)
• Tenancy risk an issue if need cash
• Borrowing in SMSF is complex & high margin for error

3. How does an SMSF buy a property?

 

 

 

In conclusion, the SMSF structure does complicate the property purchase process compared to traditional property acquisition. However, if the investment proves worthy, then it could add significantly to the retirement assets available to the members of the SMSF.

By Todd Stanford, Senior Financial Planner