Why should I purchase residential property through my SMSF?

Let’s face it, buying a house is an exciting achievement. Many Aussies dream of growing their wealth through property investment. And given Australia’s real estate market grown and grown over two decades, who wouldn’t? Luckily, if you dream of joining the property-investing elite, there are ways to do so. Buying a house through your self-managed super fund (SMSF) could be a great way to enhance your wealth and create a comfortable retirement.

residential property investment through SMSF

But before you dive into that seemingly perfect investment, you need to know whether buying a house through your SMSF is right for you.

Diversify your assets

If your SMSF has enough assets, purchasing a residential property is a great way to further diversify your investments. Ensuring you have diversified investments is an important strategy to mitigate potential losses. Put simply, if the market falters, or one of your investments fails, you want the rest of your portfolio to have your back.

Earn extra protection through hard-to-get loans

It is more difficult to obtain a loan through an SMSF than a regular loan. While this may seem like a drawback, it’s actually a benefit because it provides a little extra protection on what can be a risky investment. SMSF loans are limited recourse loans, which means that if your property investment fails, the rest of your fund is not at risk. This, in turn, makes lending rules stricter and you’ll need to put down a larger deposit of at least 20-30%. Thankfully, a smaller loan also means the fund will pay the loan off quicker.

Enjoy great tax incentives

Despite generally yielding lower rental income, well-bought residential properties typically appreciate in value more than commercial properties. So if you hold onto your residential property long-term, your fund could make more money. If you sell, capital gains on SMSF investments are taxed at the rate of 10%, providing you've held the property for over one year. However, if you decide to sell your investment once you’ve retired and are drawing a pension from the fund, the property will be exempt from capital gains tax.

Rental income is taxed slightly higher at 15%. Again, you can enjoy tax-free rental if you’ve already retired!

Don’t buy from family and friends, or let them live there

Buying a property is never simply sunshine and roses. There are rules you have to follow. You can’t buy a property through your SMSF from a person you know, like a friend or family member. Nor can you let them live there, or live there yourself. The same goes for a holiday home – no one you know can stay there.

There are very strict laws around this – and breaching them is never worth the risk. On the upside, these rules are designed to protect your fund by ensuring transactions are made on a commercial basis and with wealth accumulation in mind.

It’s important not to get caught up in the excitement of buying a residential property. It’s vital that you carefully consider whether buying a residential property through your SMSF is right for you. If you want to learn more about SMSFs, download an information pack today.

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