Residential investment is common with investors holding an SMSF. And now that the weather is clear and beautiful for long stretches and especially because the festive season is coming up, we might see these selfsame residential investors looking for home renovation. This though may not turn out well unless you understand compliance for renovating residential properties held under SMSF.
Renovating a property bought with borrowed money (with current outstandings)
As a first, it is crucial to figure out whether the property you are looking to renovate was bought with money borrowed against SMSF or accumulated in the fund. Let us suppose you have borrowed against your SMSF and still have certain outstanding amount against the borrowing. In such cases, you are not entitled to renovate.
The maximum extent till which you can go is make repairs to such properties. And repairing is no renovation — not by a long shot. Put another way, you are not making any characteristic change in the property, but just rectifying it so that it can withstand the rigours of time, climate, and natural depreciation.
Renovating a property bought with borrowed money (with money accumulated in SMSF)
Now, let us take up another case where you have borrowed money against your SMSF but you have some of it accumulated in your fund, too. If you are using this amount to make home improvements, you can jolly well go ahead with the pursuit. This said, there are certain restrictions, some of them implied. For instance, you cannot make renovations in order to change the residential unit into a commercial kitchen.
Renovating a property bought with SMSF fund (no borrowings)
Now, let us take up the third case where you have not made any borrowings and have proceeded with the real estate purchase solely with the help of money accumulated in your fund. Good news is that there are no restrictions on what you can do. You can even completely demolish the property in question and build anew. It is just that you must not bypass the investment strategy of your SMSF lest you create inroads for a renovation disaster for your SMSF.
If you are unaware about certain things related to renovating a property purchased through SMSF, feel free to contact me.
