If you are drawn to the concept of investing your retirement savings in investment property but don’t have enough saved in super to do so, SMSF Borrowing might be for you. Providing certain conditions are met, a Self Managed Super Fund (SMSF) can borrow to invest in property under a Limited Recourse Borrowing Arrangement (LRBA).
This greatly increases the potential for property investment options using your super, as having (say) $200,000 in super no longer prevents you from purchasing a property valued at $500,000.
Advantages of Buying an Investment Property with SMSF Borrowing include:
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Pay less Capital Gains Tax (CGT)
CGT within a SMSF is generally capped at 10% and can drop to 0% if you start a pension.
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Grow retirement savings faster
All income and capital growth goes into SMSF which accelerates growth of your super
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Pay off SMSF loan quickly
Contributions and rental income from the property are used to pay off the SMSF loan
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Reduce tax on contributions
Loan interest is tax deductible to your SMSF which can help reduce SMSF tax liability
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Buy commercial premises for business
Your SMSF can purchase business property and rent it to a related party business
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Provide retirement income
Once your SMSF owns the property outright, rental income can be used to fund pension payments
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Leverage
Provides opportunity to maximise capital growth as rental income can be used provide cashflow to fund further property investment
Issues to consider
• Borrowing to invest has significant risks which must be clearly understood
• Your SMSF trust deed must explicitly permit borrowing to invest
• Your SMSF must have sufficient cashflow to make loan repayments e.g. regular employer or personal contributions
• Establishing a SMSF with a loan incurs initial and ongoing costs. Such costs need to be considered against potential benefits before embracing this strategy
Example
Daniel and Simone have $200,000 in combined superannuation. They intend to establish a SMSF and buy an investment property worth $500,000.
Using a SMSF loan, Daniel and Simone’s SMSF can borrow $300,000 using the property as security.
The property can be rented to an unrelated party at market rates and the rent, together with further super contributions and/or other SMSF income, is used to repay the loan. Once the loan is paid off, Daniel & Simone have (indirect) ownership of a property that can be used to fund their retirement
If you would like to find out more about purchasing property using a SMSF please feel free to give us a call on 02 9913 9995. We are located in Narrabeen on the Northern Beaches of Sydney.
Disclaimer: This publication has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions.
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