Buying property using your super fund has never been easier or more popular. Here’s why.
Property is a staple investment for many Australians. Real estate investment can promise stable yields, strong capital growth and tax advantages, especially if you use super to buy an investment property.
Can I use my superannuation to buy an investment property?
Yes, you can use super to buy an investment property. But you cannot use a regulated superannuation fund to do so, like an industry super fund or retail super fund. To buy a property using your super, you’ll need to set up a Self Managed Super Fund (SMSF).
An SMSF is a private super fund that you manage yourself, which is why you might hear it called DIY super fund.
As we’ll see, SMSFs and property go hand in hand.
What type of property can I buy in my super?
You can purchase commercial or residential property using your super. But because your SMSF is designed for investments, like a commercial property investment or residential property investment, you cannot live in the property.
The property you purchase in your super must be located in Australia. There is no limit on the property value you purchase in your super fund, and there is no minimum property value.
What are the benefits of investing in an SMSF?
Strangers to SMSF investment will be happy to see the range of benefits from using an SMSF to invest in property. If you use super to buy an investment property you’ll see a few positives:
Capital Gains Tax (CGT) is most likely capped at 10 per cent for real estate purchased in an SMSF, and reduces to zero per cent in certain circumstances.
Also, interest that your loan accrues is tax deductible for your SMSF. This can help reduce your SMSFs tax obligations.
Pay loan off quicker
With rental income and contributions from your super, you can pay off your loan quicker than you would without these income streams.
Pay yourself rent
If you own a business, you can be your own tenant by buying a commercial property in your super and moving your business into the premises.
Rent is paid from your business (the tenant) to your SMSF (the landlord).
Strengthen retirement income
Your SMSF captures all income and capital gains from the property investment in your super.
Also, if there is no loan on the property your SMSF owns, you can use rental income to fund your pension account. This investment income is tax exempt, and is called Exempt Current Pension Income (ECPI).
Should your property investment go awry, the bank cannot hunt down your home, car or personal savings to repay the loan. This Limited Recourse Borrowing Arrangement (LBRA) is why many use super to buy an investment property.
Can I take out a property loan in my super?
Yes, you can take out a loan in your super to purchase property as long as your SMSF trust deed permits it. And there’s a stack of reasons why you would.
Limited Recourse Borrowing Arrangement
Borrowing in your super to purchase property is called a Limited Recourse Borrowing Arrangement (LBRA). This is when an SMSF trustee takes out a loan from a third party lender, like a bank, and uses the money to buy property in a separate trust.
The beauty of an LBRA, also known as a non-recourse loan, is that if the borrower defaults or can’t repay the loan, the lender can only use assets in the separate trust to repay the debt. The lender cannot go after the borrower’s personal assets, like their car, personal savings or home, to repay the property debt.
Borrow in your super for the right kind of investment
If you’re looking to take out a loan in your super to purchase a property, you should consider whether it’s the right kind investment for your SMSF.
SMSFs can be expensive to set up, so you might want to find an investment with strong income to outweigh the expenses.
This is why many investors turn to SMSF commercial property investment: High yields offset the costly burden of setting up a Self Managed Super Fund.
Can I invest in an unlisted property fund using super?
SMSFs can be an effective investment vehicle to shelter investment earnings and profit from tax obligations, especially if investing in an unlisted property fund.
An unlisted property fund, also known as an unlisted property trust or commercial property syndicate, pools money from different investors in order to buy commercial real estate with a high price tag.
As long as an unlisted property fund meets the criteria of the Superannuation Industry (Supervision) Act 1993, you can capitalise on tax effective cash flows and capital growth by using your super to invest.
For more information on investing in property using your super, get in touch Properties & Pathways today.
Any information provided on this website has not considered the objectives, financial situation or needs of any investor; investors should consider whether it is appropriate to them to partake in a commercial property investment prior to investing, in light of their objectives, financial situation or needs.
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