Self-Managed Super Funds (SMSFs) offer Australians greater control over their retirement savings, and property investment is one way people can take advantage of this flexibility. But before diving in, it’s important to understand the key factors that come into play. 

Here are six considerations when exploring SMSF with property.

1. You can borrow, but there are restrictions
SMSFs can use loans to purchase property through a Limited Recourse Borrowing Arrangement (LRBA). However, lending criteria is stricter than standard home loans, and not all banks offer SMSF loans. Borrowing capacity is assessed based on the SMSF’s income, not personal income, which may limit loan options.

2. Rental income and tax benefits can help
Rental income from SMSF-owned properties is taxed at a concessional rate of 15%, which is lower than most individual income tax rates. If the SMSF is in the pension phase, rental income may even be tax-free. Capital gains tax (CGT) is also reduced if the property is held for more than 12 months.

3. Your super fund must meet compliance rules
SMSF trustees must follow strict rules, including ensuring the investment aligns with the fund’s documented investment strategy. The Australian Taxation Office (ATO) also requires annual audits and compliance with superannuation laws. Failing to meet these obligations can result in financial penalties.

4. You can’t live in the property
One of the main rules for SMSF property investment is that the property must be for investment purposes only. It cannot be lived in by the SMSF members or their relatives. This applies to both residential and commercial properties, making sure the asset is used solely as an investment.

5. Commercial property can be used for business
SMSFs can purchase commercial properties and lease them to a related business, provided it is done at market rates. This strategy can be particularly beneficial for business owners, allowing them to pay rent directly to their SMSF rather than a third-party landlord.

6. Liquidity and diversification are important
Property is an illiquid asset, meaning it can be difficult to sell quickly if the SMSF needs cash. It’s important to make sure you balance property investments with other assets such as shares, cash, or managed funds to ensure the fund has enough liquidity to meet expenses; for instance, pension payments for retired members.

Investing in property through a SMSF can be a great wealth-building strategy, but it’s not for everyone. It requires planning, and compliance with regulations. Speaking to an experienced mortgage broker and financial adviser can help determine whether it will be a fit with your personal and retirement goals.

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