The second revenue stream is from realising capital growth in the property once it is sold. While still subject to tax, properties held long-term by an SMSF can yield hefty returns that may not be matched by other investment classes.
Restrictions on investment
There are specific regulations in place for the purchase of property with an SMSF.
ASIC's MoneySmart has a comprehensive guide to property investment restrictions.
The majority of these restrictions relate to occupation for residential properties.
As with all superannuation-funded investments, properties can only be used for purposes of investment.
SMSF-owned residences cannot, for instance, be occupied or rented by any of the SMSF’s trustees or parties relating to them, nor can a property established as a holiday home be used by any trustee or family member.
However, these occupation restrictions are largely unique to residential properties.
Commercial properties are treated differently, and can in fact be owned by an SMSF and tenanted to a business operated by a trustee or family member.
As such, there are decisions of not just whether to invest in property, but which type of property to examine.
Funding property acquisition
How you fund the property will depend on how much your SMSF has available to invest.
If there is enough cash available, the fund can purchase the property outright. Things are less straightforward when a loan is required to fund part of the property.
Unlike the purchase of an owner-occupied property with the help of a mortgage, using an SMSF to fund a property acquisition requires a particular loan agreement known as a limited recourse borrowing arrangement.
This facility places certain restrictions on the use of borrowed funds, such as that loans can only be used to purchase and maintain a property and not to carry out improvements.
Additionally, ASIC points out that tax offsets can only be used against the fund’s earnings, not your own personal income, and that enough cash needs to be available within the fund to service loan repayments and ongoing property maintenance expenses.
While there are many benefits to using an SMSF to invest in property, care must be given to adhering to the strict regulations in place in order to ensure the investment endures.
Be sure to investigate all types of property in which to invest in order to achieve the best returns for your superannuation.
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