I know I can buy a property with my SMSF fund. But what is the advantage of doing so, especially the housing price is already quite high.
What is the pro and con of using your SMSF money to invest in properties?
ubor on 11/08/2013 - 23:24
Comments
Residential Property: you and anyone related to you cannot use the property, even if you pay arms-length rent, arms-length lease, etc. Its simply not allowed.
Con: There are substantial restrictions on what you can do with a property in a SMSF if you have borrowed to purchase it. For example, you can't renovate/build additions/change its nature (maintenance is OK).
Con: Loan to value ratios are much more conservative, with around 30% deposit needed for a mortgage.
Pro: Borrowing is non-recourse, so the bank can only take the property if you default, not come after you for the loan balance, as they can with normal mortgages.
Pro: substantial tax benefits for positively geared investments
Con: negative gearing is not a suitable strategy due to low tax rate
Con: borrowing costs are higher both in interest and set-up (you need a special holding structure)All that said, I anticipate adding a property to my SMSF this year or next.
(of course, some of those cons are actually pros if you are a more prudent investor).
The main benefit of holding property in a superannuation fund is the same as holding any investment in super, that being the reduced tax rates.
Income in a super fund is only taxed at 15%, and capital gains are only taxed at 10%.
Further, once you reach preservation age you can convert the fund balance to pension phase and the fund pays no tax at all.
There are also other benefits of being able to salary sacrifice any short fall between rental income and expenses.
There are strict rules on borrowing within in super funds however, and if you get it wrong and your fund becomes non-complying there are severe penalties.