It is critical to understand all of the restrictions and conditions related to using an SMSF to purchase real estate. An SMSF investment loan lets users put their retirement money as a down payment for a property. In order to purchase property with your SMSF, you must ensure you comply with the rules set out by the ATO.
While you can use your SMSF to buy property and take out an investment loan, it is best to speak with a mortgage broker and always seek tailored advice from a qualified accountant or tax agent before proceeding with this decision.
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Obtaining an investment loan using SMSF to buy property involves very strict borrowing conditions. All SMSF investment loans must be taken using a limited recourse borrowing arrangement (LRBA), involving establishing a separate property trust and trustee on behalf of the super fund, outside of the SMSF structure.
The superfund’s bank account receives all of the property’s income and expenses, and the superfund is responsible for all loan repayments. If the super fund fails to do so, the lender will only have recourse to the property held in the separate trust and will be unable to access the super fund’s remaining assets.
Aside from adhering to ATO SMSF property laws, it’s a good idea to match your investment property to your fund’s investment strategy and risk profile.
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When seeking an SMSF investment loan, you should be aware of the following risks:
Costs of compliance: SMSFs must value, based on objective and verifiable evidence, all of their assets at market value
Higher costs: SMSF loans might be more expensive than other types of property loans.
Cash flow: When purchasing property with an SMSF, your loan repayments must be made from the SMSF’s bank account. As a result, you’ll need to make sure your fund has enough cash flow to cover repayments at all times
Difficult to cancel: You can’t undo the arrangement for an SMSF property because it’s difficult to terminate. If there is a problem with your loan documentation or contract, you may be forced to sell the property, which could result in significant losses for your SMSF.
Possible tax losses: You can’t use taxable income outside your SMSF to offset tax losses from the SMSF property.
Commercial property tax considerations: If you invest in commercial property and earn more than $75,000/year, you must register for GST.
Capital gains tax considerations: If you decide to sell the property, you must pay the relevant capital gains tax. Before purchasing property with an SMSF, you should consult with a certified accountant or tax consultant to explore any possible tax implications.
No alterations to the property: You are allowed to undertake routine repairs and upkeep to the property, but improvements and renovations are not permitted under the LRBA guidelines. The property cannot become a new asset as a result of any maintenance or repairs.
It is critical to understand all of the restrictions and limitations related to using your SMSF when acquiring property. These risks further outline the significance of seeking specialist advice before buying property with an SMSF, and this is what we are here for.
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Disclaimer: Information included in this post is of general nature, it has been prepared without taking into account your specific situation. It is not intended to be and does not constitute financial advice, investment advice, trading advice, or any other advice. You should not make any decision, financial or otherwise, based on any of the information presented here without undertaking independent due diligence and consultation with a professional accountant or financial adviser.