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Buying property through your SMSF can be a highly effective way to build your retirement savings. Here’s what you need to know to get it right.
Self-managed super funds (SMSFs) offer investors the opportunity to buy property with cash accrued in their super fund. This comes with some lucrative benefits that may help build your retirement savings, but keep an eye out for the rules governing what you can and can’t do with your SMSF property investments.
SMSFs offer a key benefit of using the accrued cash in your SMSF to fund the purchase of investment properties.
This has, in part, driven a recent surge in the popularity of SMSFs. According to the Australian Taxation Office, the number of SMSFs grew by 27 per cent in the five years to 2014-15.
If you have the cash available in your SMSF, you can buy an investment property outright and set up a rental income stream that will pay into your fund leading up to and during your retirement. You can also borrow money to buy property through your SMSF, which may help grow your portfolio for potentially big capital gain returns when you retire.
Here are four things you need to know about buying property through your SMSF:
1. You need a clear investment strategy
Before you dive into property listings, you need an investment strategy in place to ensure any properties you buy are aligned with your financial goals.
For example, you need to decide if you want to draw an income from rent paid on the property you buy, or cash in on long-term capital gains when you sell – or a combination of both. Either way, your investment strategy will determine the type of property you should buy, and how you finance it.
2. You can buy residential and commercial properties
You can buy both residential and commercial properties through your SMSF. If you have the available cash in your SMSF to buy a property outright, you can do so without taking out a loan. Or you can choose to use the cash in your SMSF to cover the deposit and borrow the rest.
The direction you choose depends on your investment strategy. If you want a positively geared property that generates income via rent, you’ll want to borrow as little money as possible. However, if your strategy is focused on long-term capital gains, you may consider borrowing a higher proportion in order to build your property portfolio faster.
3. There are tax benefits before and after retirement
The tax benefits of buying a property through your SMSF begin well before you retire. Capital gains and rental income generated by your SMSF-owned property are generally taxed at a low rate of 15 per cent – and the tax rate on capital gains drops to just 10 per cent after you’ve held the property for more than a year.
You’ll also stand to benefit when your SMSF goes into pension phase after you retire. If you sell an SMSF-owned property after this point, you’ll pay no capital gains tax. If you hold on to the property, you are not required to pay tax on any rental income you receive during the pension phase.
4. You can use your investment property as your business property
While you can’t live in your SMSF-owned property, use it as a holiday house, or rent it to your family members, you can use your SMSF to purchase your business property. In this case, your business becomes a tenant of your SMSF and pays rent to it like it would to any other landlord.
It’s important to make the distinction here that your SMSF is buying your business premises only – not the business itself. SMSFs are prohibited from buying or running businesses.
Buying property through your SMSF can be a powerful way to build your retirement savings, but you’ll need a clear investment strategy and the determination to stick to it.