(July 2024 Blog) Why buying property through your SMSF can be a savvy move?

Why buying property through your SMSF can be a savvy move?

Data from the Australian Taxation Office (ATO) shows a growing trend: more Australians are turning to their self-managed superannuation funds (SMSFs) to invest in property.

Between the March 2023 and March 2024 quarters, the value of property held by SMSFs grew 11.5%, highlighting the growing appeal of this strategy for retirement planning.

But, to unlock these benefits and contribute to a more comfortable retirement, choosing the right property is crucial. 

Benefits of buying property through SMSFs

One of the biggest advantages of investing in property through your SMSF is the potential for tax-efficient rentals. 

In the case of residential property, provided you are not renting the property to one of the SMSF trustees or their family members, properties can generate income taxed at a concessional rate of 15.0% within the fund. Once you reach retirement, the tax rate is 0.0%.

This is significantly lower than the tax rates most individuals have.

Commercial property, which can be leased to a trustee’s business, offers similar tax advantages. An additional benefit of this is that rent paid by the business is fed back into the SMSF, so you are effectively paying rent to your future self.

Additionally, investing in SMSF properties helps you diversify your wealth portfolio. By including real estate alongside traditional assets like stocks and bonds, the fund spreads risk.

Properties held within an SMSF qualify for capital gains tax (CGT) benefits, depending on what phase your SMSF is in. If you are still in the accumulation phase, CGT will be taxed at the same rate of 15.0% as any other income in the fund. If you’ve had the property for more than 12 months, you qualify for a further discount of one-third, so your CGT will only be 10.0%. 

If you sell the property during the retirement phase, there is no CGT liability.

Drawbacks of buying property through SMSFs

Compliance is a major consideration. The property must meet the sole purpose test of solely providing retirement benefits to fund members.

Additionally, for residential property, the property must:

● Not be acquired from a related party of a member

● Not be lived in or rented by a fund member or any fund members’ related parties

For commercial property, the property can be:

● Acquired by the fund from a member or related party of members, providing the purchase is at market value

● Leased to a fund member, but it must be leased at the market rate

What to remember when buying your SMSF property 

Location is very important as you will need to find an A-grade property that suits your budget and has good potential for rental income. 

Upcoming infrastructure projects like new transport links or commercial hubs can boost property value and rental demand.

When considering your potential rental income, look at factors like property type, current asking rents and the potential for rental increases.

Zoning restrictions will dictate how your property can be used, so you should ensure this aligns with your intended use.

Finally, it's important to have clear and accurate contracts so that all parties are current on the process. This includes your sales contract and rental agreements.

Consider hiring a professional

Given the complexities involved, working with professionals when buying property through your SMSF is advisable. This includes your financial advisor, a mortgage broker, a buyer’s agent and potentially a property management company for the rental.

For example, your financial advisor will help ensure you are complying with SMSF regulations, minimising the risks and maximising the potential benefits.

A buyer’s agent will help you find an A-grade property that suits your needs and budget. They can provide guidance around the property location, type and rental demand in the area.

Looking to buy a quality investment property? As an expert buyer’s agent, A Game Property Advisory can help you secure a quality property at a good price. Get in touch with Jim by calling 0422 446 170 or emailing jim@agameadvisory.com.au.