Some days it can feel like you need a law degree to understand the ins and outs of SMSF obligations. Purchasing an investment property through your SMSF is not as simple as buying a personal investment property. There are laws and regulations that you must comply with, and the consequences of a breach, even unintended, may affect your SMSF’s balance. While it’s always best to speak to a qualified advisor, here are a few things to consider when thinking about SMSF property investments.
You must use a limited recourse loan
SMSFs use limited recourse loans when buying property with borrowings. While these loans are hard to obtain, the good news is that your SMSF’s other assets are protected if the investment fails or loan repayments become too onerous. To compensate for this risk, lenders typically require at least a 20–30% deposit.
You must satisfy the sole purpose test
Property investments through an SMSF are to save for your retirement. That means you can’t live in a property your SMSF has purchased, and neither can your family and friends. Similarly, you can’t buy or sell an SMSF-purchased home to family or friends. And yep, you guessed it – the same goes for holiday houses.
The rules around commercial properties are slightly different. Your fund can lease a commercial property back to you if you run a business, but you must pay rent at market value.
Regulations are strict, so don’t go looking for loopholes. Your SMSF also can’t own a share in a trust or a company that owns a property if you, your family or your friends control the trust or company.
You can’t renovate the property
When investing through an SMSF, you can’t make any alternations that would dramatically change the property – so don’t pull out the toolbox just yet. Your SMSF can only pay for general maintenance and repairs. If you’re a fan of home renovations, your SMSF isn’t the best way to live out that fantasy. Instead, consider purchasing a property that’s already in good nick.
That said, if your SMSF owns the property outright (i.e. you don’t have a loan), improvements can be made. Be sure to check that it’s okay first though, as there are other legalities surrounding this that you’ll need to follow.
You can’t subdivide or buy a property on more than one title
Just like how you can’t renovate or improve a property through your SMSF, you can’t subdivide a property for development. Your SMSF can only purchase each property as a single asset. Subdivision creates a property on more than one title, which is a big no-no.
Your SMSF is also restricted from buying a property on more than one title, even if the property is sold as a single entity.
You must purchase the property in the right name
Be careful to dot your ‘I’s and cross your ‘T’s when investing through your SMSF. One common mistake people make is purchasing their property in a personal name rather than the SMSF's. Silly mistakes like this could force you to change ownership, which risks breaching the sole purpose test and may incur stamp duty twice.
It is vital to ensure that you and the SMSF comply with legal obligations. Failure to comply may result in extra costs which could cause a significant hit to your wealth. If you want to learn more about SMSFs, download an today.