If you’re trying to get your foot in the door of the property market but are struggling to scrape together the necessary funds, you might consider using the money in your self-managed super fund (SMSF).
Investing in property with your SMSF offers an alternative way to build your portfolio and help set yourself up for an independent retirement, without dipping into your current savings.
According to the Australian Taxation Office (ATO), Australians currently have around $590 billion invested in more than half a million SMSFs. Part of the attraction that’s driving Australian investors to manage their own super is the potential to grow your retirement savings through property investment.
Whether you have the cash available in your SMSF to buy an investment property outright, or want to borrow to cover the difference, here are some tips on using your SMSF to invest in property.
Borrowing to buy property
If you don’t have enough money in your SMSF to purchase a property outright, you do have the option of borrowing to buy.
Your SMSF provider might be able to connect you with approved lenders, who can provide the finance you need to purchase either a residential or commercial investment property.
The benefits of this are two-fold. Firstly, since you can use funds already in your SMSF as a deposit, you might be able to buy an investment property much sooner than if you had to save a deposit out of your own pocket.
Secondly, using an investment property to set up an income stream that pays into your SMSF, or cashing in on capital gains at discounted tax rates when you sell, might help fund your next property purchase if you’re keen to keep growing your portfolio.
Positive vs negative gearing
Before you start developing an investment strategy, you’ll need to understand the difference between positive and negative gearing.
Positive gearing is when you buy an investment property with the expectation that you’ll draw income from collecting rent. That means the rent you charge needs to be more than the interest on the loan and associated property expenses to create a regular profit. This income must be paid into your SMSF for use during retirement.
Negative gearing, on the other hand, is when the rent you collect is less than the interest on the loan and expenses of managing the property. You can claim the losses you make against your taxable income. This option focuses on long-term capital gains – that is, the amount a property increases in value over time. The goal is that when you eventually sell the property, the capital gains will cover your short-term losses and deliver a final profit.
The tax benefits
The tax benefits of using your SMSF to invest in property run deeper than using negatively geared losses to reduce your income tax.
If you’ve positively geared a property, any rental income that is generated is taxed at a low rate of 15 per cent. When you sell the property, capital gains are taxed at 15 per cent if owned for less than a year or 10 per cent if you’ve owned the property for more than a year.
But the news gets better. If you sell your investment property after your SMSF goes into the pension phase, you pay no capital gains tax. Alternatively, if you hold onto the property, you won’t pay any tax on the rental income you receive during the pension phase.
Associated costs and restrictions
There are costs associated with operating an SMSF that you should be aware of. In addition to interest charges on your mortgage, if you have one, and the costs of managing an investment property, you’ll also need to pay for an annual independent audit of your SMSF and cover any associated legal, insurance and administration costs.
You’re not allowed to buy a property from a member of your SMSF or any related party, and you can’t live in a property owned by your SMSF, use it as a holiday house, or rent it to members of your family. However, you can use a trust to rent any commercial property you purchase through your SMSF to any businesses you own.
Using your SMSF to invest in property gives you the potential to grow your retirement savings, helping you set yourself up for an independent financial future.