Buying an investment property with super
Hi, I’m here today to talk about investment properties and buying investment properties with your superannuation. Remember, we’re talking all things super here. I’m just a mere accountant and mortgage advisor, I’m not a financial planner, so take this as only general advice, and you need to speak to a financial planner if you want to talk about investment decisions with your superannuation, or you take it into your own hands.
First and foremost, can I sell my investment property into my super fund? Well, you can do many things with your super fund. The primary transaction however, has to be what we call an arm’s length transaction. So it can’t be biased. So the ATO will be looking at if you’re doing a favorable purchase, are you trying to sell it cheap into super, or are you selling it more expensive into your super fund to try and draw money out intentionally.
However, if you do have a investment property, and you do want to transfer it into super, there should be no reason why you can’t do that. You will have to look at the stamp duty implications on that transaction as well. And it has to be an arm’s length transaction. So, I would imagine the audit would pick it up as a qualifying transaction, which would mean the ATO would want to investigate that transaction. Just by the mere fact that you own it and you’re trying to transfer it into your super fund. So it’s possible, but it would be difficult.
Can I live in a self-manage super investment property? No, not really. Because again, you have to have that independent transaction nature, and you living in that property makes it not an independent transaction. And we can’t use our superannuation money for personal use whilst it’s in accumulation phase. And this is where superannuation can be quite tricky to manipulate for yourself. So speaking to an experienced advisor about all this is fundamentally important.
Can I rent my self-managed super fund property? Well, isn’t that the same as living in it, Greg? You’re renting, you’re paying rent to the self-managed super fund property. I think that’s what maybe the question is. But no, you can’t rent. I wouldn’t recommend it. Again, arm’s length transaction. So I wouldn’t live in the property and pay myself market rent to it. I think you’re bordering on the too much conflict there, and the ATO isn’t going to like it, and the auditors that audit your super fund aren’t going to like it either.
And the final one, can I rent my property inside super to a family member? Again, I would highly disregard it. I mean, to the letter of the law, you may be able to get away with it, but it’s going to be very complicated. Complicated. There’s got to be arm’s length transactions involved in it. The ATO is definitely going to want to look at that transaction, and it’s just going to be so difficult, it’d be more harm than good in doing it.
Again, independent all the way with any of your superannuation transactions. Give you a perfect example, which is a bit more random, let’s say you buy a $100,000 picture, and you buy it with a self-managed super fund. You can’t actually get that picture and put it up on your wall at home, because you’re actually using that picture. So you either need to store it in a vault, or you can store it at an art gallery or lease it to an art gallery, but you can’t actually use it for personal use. And this is where the difficulty in super becomes, because too many of us get tempted by the fact of using the super for personal use. And the ATO know that, and that’s why they’re so hard on the rules with superannuation.
Buying an investment property with super 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.