Buying an investment property using the money in your superannuation is becoming an increasingly popular option with many people. Not only do you have the potential of capital growth on the property’s value, but you also have the advantage of rental income being contributed into your super fund each month.
You might also be able to take advantage of some potentially significant tax advantages by investing in residential property through your SMSF.
It sounds so appealing on the surface, but there are some important things to consider before you jump in at the deep end.
Seek Professional Advice
It’s strongly recommended that you seek advice from a qualified, licensed Financial Advisor who specialises in self-managed super funds before making any investment decisions.
The compliance issues surrounding SMSFs can be complex, and fines for non-compliance can be steep, so it pays to be sure you’re going about the process the right way.
Understand the Fees
There are fees and ongoing costs associated with running your SMSF. It’s important you discuss all the potential costs associated with setting up and operating your self-managed super fund with your Financial Advisor before you proceed.
Understand the Tax Implications
Investing in property through your SMSF could help you take advantage of some important tax benefits. For example, tax on any earnings within your SMSF is capped at a maximum of 15%. If your SMSF earns interest on savings, dividends from shares, or rental income from an investment property, the tax is capped.
Of course, you may also be able to claim some deductions through your SMSF for owning an investment property. Some common deductions include your council rates, mortgage interest, insurance premiums, property agent’s fees, and maintenance on the property.
Then there’s the benefit of potentially reducing your capital gains tax bill to 0% if you only sell the property after you retire and switch your SMSF over to the ‘pension phase’.
Setting Up Your SMSF
When you’ve determined that setting up a SMSF is right for your financial situation, it’s time to set up your fund. You can do this with the help of a professional Financial Advisor to ensure your trust deed is worded correctly to allow you to borrow money for your property investment.
Borrowing Funds to Purchase the Property
Your SMSF can borrow money to cover the costs associated with buying a residential investment property using a specific type of loan. Banks call these types of loans Limited Recourse Borrowing Arrangements (LRBA).
You will need to pay a deposit on the property out of the funds in your SMSF, but the LRBA covers the remaining purchase costs. The rental income you receive from your tenants helps to pay the loan repayments each month.
As LRBA mortgages are quite complex, it’s recommended that you speak with a good mortgage broker who understands the intricacies of setting up these types of loans.
Investing in property through your SMSF gives you the opportunity to take control of your retirement savings and choose how your money is invested. Call us today on 1300 832 554 to discuss how you can start investing in property using your super.
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Disclaimer: We recommend that you seek independent financial and taxation advice before acting on any information in our articles and newsletters. They contain general information only and have been prepared without taking into account your personal objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. Interest rates are subject to change without notice. Lenders terms, conditions, fees & charges apply.