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Must-know rules about property investment with borrowing

Regulators have loosened their grip to allow SMSF members to purchase property using borrowed funds. But is this the right strategy for you?

Property ownership is a popular investment for many reasons – relative stability, foreseeable growth… Plus, it’s tangible. So if you’re thinking about investing in property, but don’t have enough funds to make an outright purchase, you may be interested to know that it’s possible to borrow money from a lender to purchase property through your Self Managed Super Fund (SMSF) and receive many of the same benefits as traditional property investment.

Property investment rules with borrowing

Is property ownership the right investment decision for you?

Before we all get too excited about the possibility of owning a new property (or perhaps adding to our existing portfolio), first thing’s first. You need to decide whether property ownership is the right decision for you – in investment-only terms.

Forget, for a moment, whether or not you’re able to meet the strict borrowing rules and regulations in a SMSF context, and decide – excitement and emotion aside – whether property is the best possible next step for your SMSF portfolio.

Does property represent an appropriate level of risk exposure, given your current cash flow requirements and diversification preferences? Do you have resources available for any improvements required to the property, given borrowed funds can only be used for repairs? Are you aware that you cannot live in or rent the property yourself (or any of your ‘related parties’), unless you purchase a commercial property and use a trust to rent the property to a business you own? Are you prepared to hold the property for a full cycle of seven to ten years, if the market enters a downturn after purchase?

These are just a few of the considerations relevant to purchasing property using borrowed SMSF funds. If you’re serious about proceeding, we strongly recommend that you seek independent financial advice and become acquainted with the finer details, including those available on ASIC’s website.

Great, you’ve done your research. Now, what’s in it for you?

The big drawcard here is that you don’t need to exhaust your superannuation balance to purchase a single asset. Previously, regulators prohibited the borrowing of SMSF funds, limiting members to either choose between waiting until they had enough funds or steering clear of property altogether. Now, you can now maintain your other investments and purchase a property using borrowings, using what’s known as a limited recourse borrowing arrangement (LRBA).

Positively geared investments are also taxed at your SMSF’s rate of 15%, rather than your nominal tax rate, creating what could be a fairly substantial tax incentive. And the rent you receive from the property before you commence a pension could prove to be a significant alternative income generator for your fund. Similarly, any rent you receive after you commence a pension is also tax-free.

There is also the possibility of eliminating capital gains tax (CGT) on the investment, if you sell the property and collect your profits after you enter the pension phase.

Like any investment, you’ll need to weigh up whether buying a property using borrowed funds through your SMSF is a good next step for you. But get it right and you might just find that your future (retired) self is mighty pleased you did.

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