Buying Real Estate with an SMSF
SMSF Property Ownership
An SMSF has long been able to buy real estate which was then rented to a business operated by the members of the fund. This is a classic asset protection strategy which can also provide taxation savings on the rent which is paid to the SMSF. This is because the operating business gets a tax deduction at the company or personal tax rate but an SMSF pays a maximum of 15% (and sometimes lower).
An SMSF can also own an investment property which is not rented to related parties. This can have taxation advantages because of the difference between the income tax paid on rents and capital gains tax on sale compared to personal or family trust ownership.
SMSF Borrowing for Real Estate Purchases
In recent years, the prohibition on SMSFs borrowing money to acquire investments has been removed and replaced with some complex requirements. The requirements include the type of holding structure for the property, uses that can be made of borrowed funds and how many assets can be acquired. There are also restrictions on construction and development activity which can be undertaken by an SMSF.
While these rules are an additional layer of complexity for SMSFs, the potential benefits could be significant. The new rules allow trustees to access the advantages of real estate ownership by an SMSF without requiring that the SMSF pay cash for the property.
The decision on SMSF, personal or family trust ownership of real estate needs careful consideration. An SMSF pays low or no capital gains tax but limited benefits from negative gearing. This is because it saves a maximum of 15% tax on real estate rental losses. PKF can help evaluate real estate purchases so that the SMSF is utilised appropriately.
While borrowing by an SMSF is allowed, there are limited lenders making funds available. Those who do provide such loans can have high costs and extensive requirements. PKF can help trustees identify lower cost and complexity borrowers and assist trustees put together all the complex requirements for geared SMSF ownership of real estate.