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Is investing in property through your SMSF right for you?

Australia’s love affair with investing in property has been a key driver of personal wealth. Using an SMSF to purchase an investment property has become increasingly popular with people wanting to increase wealth and diversify their investment portfolio.

However, investing in property can be risky. While property values can rise quickly, as we have seen across many Australian property sectors in the last decade or so, they can also fall quickly. Consequently, investing in property through your SMSF may be more beneficial for people with long-term investment goals.

As with any investment option, there are advantages and disadvantages, as well as certain risks, that must be considered before buying an investment property through your SMSF.

Investing in Property through SMSF

Enjoy tax concessions and investment income

Put simply, the benefits of investing in property through your SMSF come predominantly from tax concessions. The most obvious is the 15% tax rate on superannuation investments compared to generally higher personal tax rates.

Investing in property also has the added benefit of providing potential sources of revenue to drive growth in your retirement savings. Generating income from your SMSF-purchased property can be used to fund other investment purchases, as well as utilising tax breaks if the property is negatively geared. Rental income paid to your SMSF is also only taxed at 15%, which can be reduced to 0% in certain circumstances.

Despite being subject to relatively high purchase/sales taxes such as stamp duty and capital gains tax, properties held long-term can yield higher returns not generally seen with other investments.

While there are clear benefits to SMSF property investment, there are things you need to know and certain regulations you must adhere to.

Understand the restrictions on how you use your property

As with other superannuation investments, SMSF properties can’t be used to purchase or pay off your home or holiday home – they must be used to save for your retirement. SMSF-purchased properties also have exclusions on trustees of the SMSF or their relatives from occupying the property. Your SMSF also cannot purchase a property that you, a friend or relative already owns.

Commercial properties, however, can generally be purchased and occupied by an SMSF trustee or family member, provided rent is paid at the market rate.

Ensure you have diverse assets first

Before investing in an SMSF-purchased property, it’s important to make sure you have a diverse range of assets in your superfund. No matter what you’re investing in, it’s inadvisable to pour your entire SMSF into the one investment. Ensuring diversified investments will prevent your investment strategy being considered too risky and will shield you from losses or market volatility.

Prepare for the complexity of SMSF loans

SMSFs can only use a limited recourse loan to purchase an investment property. This means that if the fund defaults on the loan, the fund’s other assets aren’t at risk. However, it’s harder to get a loan to buy a property through your SMSF and most lenders will not lend more than 70-80% of the purchase price.

When interest rates are low, using your SMSF to purchase an investment property can outweigh your borrowing costs.

Depending on your circumstances, an SMSF-purchased investment property can be a great way to grow your wealth and build a better retirement, but it’s not right for everyone. To learn more about SMSF, download an eBook today.

If you want to learn more about SMSFs, download an information pack today.

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"I enjoy the process of investing my super by myself, which is very simple and guided all the way by ESUPERFUND."
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