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Embarking on property investment through a Self-Managed Super Fund (SMSF) can be a strategic move for Australian investors seeking long-term financial growth.

While the potential benefits are significant, navigating the complexities involved in this venture is essential.

In a previous blog, we discussed the eligibility criteria required and how one can borrow against their SMSF to purchase property. There are acute differences between buying a residential and commercial property (commercial having more tax benefits).

Buying property in an SMSF comes with more complexity. The payoff is to receive more significant levels of protection, less tax and more excellent benefits. As an SMSF trustee, you can choose investment options and maximise your retirement savings.

This article will explore the advantages, costs and tax considerations when utilising your SMSF for property investment.

The first hurdle is always to ensure you have enough superannuation funds to make the purchase. Borrowing money from SMSF has higher fees than home loans. It is essential to be aware of the costs before making investment decisions.

Costs Involved in Purchasing a Property through SMSF

Consider the following costs associated with SMSF property investment:

1. Upfront Fees:

To enter the property market, your SMSF should ideally have 30% of the value for the cash deposit plus stamp duty. Also include establishment costs, such as – financial planning fees, structure establishment costs, bank application fees and solicitor fees.

Please seek advice from professionals, as the deposit and charges will vary. Some lenders require 10% of the purchase price to remain in the SMSF bank account after settlement to secure cash flow.

2. Ongoing Management Fees:

Once the structures are established, and the property is purchased, the rental income and related expenses are received and paid from the dedicated SMSF bank account. This includes covering maintenance, rates, insurance, and commissions.

All documentation and receipts must be kept and presented to the auditor and accountant at year-end.

3. Loan Costs:

Most financial institutions will not consider lending to an SMSF unless they have a balance of at least $200,000. This is because SMSF property loans are more costly than other property loans. Ensure you include bank fees, interest, and potentially higher rates for SMSF loans in your financial planning.

These may seem like a lot, but the rewards often outweigh the costs.

Benefits of Property Investment through SMSF

Strategic Superannuation Growth
Property investment allows your superannuation to grow through potential capital gains and rental income.

Property investment allows your superannuation to grow through potential capital gains and rental income.

Diversification of Investments
Property investment within your SMSF adds a layer of diversification to your overall investment portfolio, safeguarding against market volatility.

Financial Flexibility in Early Retirement
Property investment in your SMSF can offer financial flexibility, potentially facilitating early retirement.

Tax Effectiveness
SMSFs enjoy tax benefits, with rental income being taxed at almost half the personal saving rate. One-third of capital gains for properties over 12 months are discounted, and interest payments on SMSF property loans are tax-deductible.

Let’s explore this further.

Tax Implications of Owning an SMSF Property

1. Rental Income Tax

The SMSF is taxed at 15% on rental income, with a one-third discount on capital gains for properties over 12 months, bringing any capital gains tax liability down to 10%.

2. Loan Interest Deductions

Interest payments on SMSF property loans are tax-deductible. If expenses exceed income, a taxable loss is carried forward each year. This can be offset by future taxable income.

3. Capital Gains Tax

A capital gains tax of 10% applies to property sales after 12 months. Unless the trustee has entered the pension phase and income falls within the transfer balance cap ($1.9m for the 2024 year)

4. Depreciation Claims

Trustees can claim capital works deductions and depreciation for eligible plant and equipment items.

Make The Right Move For Your Future

Property investment through your SMSF is a nuanced strategy that demands a nuanced understanding of rules, risks, and management practices.

Australian investors can navigate this landscape effectively by comprehending the benefits, costs and tax implications. There is great potential to reap the rewards of a diversified and tax-efficient investment strategy.

Professional advice is strongly recommended to ensure compliance and optimise your SMSF property investment for sustained financial success.

Making the right decision when choosing a superannuation or retirement income plan is essential. AFP helps clients plan for a retirement that suits individual and family needs.

Contact one of our SMSF specialists at enquiries@afpaccounting.com.au or call (02) 7804 1849.

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