If a property promoter without an AFS license hogwashes you into using your SMSF for property investment, chances are they have vested interest in mind. The deal might be infested with bottlenecks all along the way. If however, you use solid professional guidance from people who know the nitty-gritty of investing the SMSF purse into real estate, you can come out trumps with the strategy.
SMSF helps you diversify investments
The beauty of SMSF is that it gives you a chance to diversify your fund across various asset types; right from the league of growth assets to the income generating assets. While using your SMSF to borrow for your residential property, you are likely to find your lender covering most of the upfront cost (that, too, without mortgage insurance).
Low interest climate helps
The prevailing interest rates are very low, to say the least. They are not expected to bottom out further but there is a good chance they have plateaued without a rise expected in the immediate future. This means that you can make the maximum use of this borrowing atmosphere and help yourself with capital gains on account of negative gearing.
Negative gearing a smart foil for SMSF-based properties
Negative gearing can help SMSFs post tax deductions for borrowing expenses. If there is no positive cash flow coming from a property and the mortgage liability outstrips the rental returns, SMSF members need to pay the mortgage from their own pocket. This is where negative gearing is introduced into the picture, a strategy that works quite well for SMSF holders.
Tax deductions on the card
It is worth noting that rental income for SMSF-using property deals is taxed at 15% so that’s some usable rebate. If you are over 55 or in your pension phase (and not the accumulation phase), your rental returns will be absolutely tax free.
Don’t trespass law
It is crucial to keep in mind certain guidelines while purchasing property with your Super. For instance, make sure that you are in sync with the arm length model and do not indulge in related party transactions. In other words, purchasing/selling a property from/to another fund member can be equivalent to breach of law. Aside from this, it is significant to keep a track of the limited recourse borrowing arrangements on offer and the sole purpose test.
My idea here, in this article, is not to offer you financial advice to get into property with your self-managed super fund, but to help you ensure that you have the right structure before you venture into property investing with your Super.