6 Things to Keep in Mind when Buying Property in Your SMSF
You only have to pick up a paper these days and people are talking about how they are using their superannuation to invest in property. More so, they are borrowing and using their superannuation as the deposit. Whilst this can be a great strategy to build wealth and take control of your super, there are some rules and considerations that need to be thought through before anyone rushes out and signs a contract:
- There are restrictions on what your SMSF can borrow money for: In simple terms they can borrow to:
- Purchase a property (including all acquisition costs)
- Pay for repairs and maintenance (Note you cannot borrow to improve the property)
- Capitalise interest
- Consider using an associated party loan. This is where instead of putting large sums of money into super, usually by way of non-concessional contributions, you instead loan the money into the fund. You do need to get the paperwork correct as this loan needs to adhere to the Limited Recourse Borrowing requirement, but it allows you to have the fund repay the monies to you over time thereby not tying up all your cash inside super. This can especially be a great option for people who are quite a way off retirement, for example Generation X.
- As per above, you cannot borrow to Renovate a property. So if this is what you are intending you need to ensure your fund has sufficient cash reserves to fund any renovation. You then have to be careful that you aren’t creating a new asset in which case the full borrowing would need to be repaid.
- Just as you consider how you service debt outside of super; you need to consider it inside of super too. What would happen if you’re reliant on concessional contributions and suddenly are ill, or worse die? Insurance should be considered inside every SMSF but especially those with borrowing arrangements.
- Costs once the loan is repaid. Depending on the State that the property is located in there may be Stamp Duty associated with the transfer of the property from the Holding Trust to the SMSF upon the loan being extinguished. It is a requirement that the property is transferred.
- QLD government have confirmed that there is no stamp duty on transfer from the Holding Trust to the SMSF.
- Can the fund purchase the asset in the first place. There are restrictions on what the fund can purchase, even more so if the fund is purchasing an asset from a member. There are extremely limited circumstances where the fund can purchase residential property from a member. Also don’t forget to consider the CGT consequences on the member’s side if the fund is say purchasing a commercial property from a member.
Perhaps the most important item to note is to ensure that you seek personal financial advice before making any large investment decision. There is a required sequence of events for SMSF Borrowings and getting it wrong can be a huge cost.
The Money Edge | Bundaberg