by Jason Roccasalvo, Partner, TAG Financial Services
Investing in property can be a great way to finance your retirement. But what’s the difference between buying property in a self-managed super fund (SMSF) versus buying property in your individual name? Will you be better off buying property in your superannuation? It’s not a straightforward answer. There are a lot of variables that influence this answer including the asset type, liquidity and contribution levels, just to name a few.
We’ve outlined the key benefits and drawbacks in buying property in SMSF.
Benefits
Combining Investing as a Family
By combining your superannuation account balances with other members of your family, you may be able to invest in a larger asset.
Tax Effective
Superannuation receives concessional tax treatment on assets, where earnings within the SMSF are taxed at 15%, and capital gains at 10% for assets held more than 12 months. If you hold onto the property until retirement, the earnings may be tax-free.
Pre-Tax Repayments
You can salary sacrifice additional income to super and pay off your loan faster. Additionally other superannuation income (and liquidity) can be used to pay off the loan.
Supporting your Business
If you buy a commercial property, you are able to lease the property to your business at current market rates.
Lender
You don’t need to use a bank/lending institution. Cash permitting, you (or an entity you control), can lend to the fund. The ATO places minimum standards on these types of loans.
Drawbacks
Lack of Diversification
Having all your eggs in one basket can make it difficult when you need cash from your superannuation fund.
Set up Costs
You need to consider SMSF set up costs and higher interest rates when getting a loan through your SMSF, and balance these costs with the cashflow, tax and wealth creation benefits.
No Personal Benefit
The investment property must be purchased at ‘arm’s length’ on a strict commercial basis. If the investment is a residential property, you cannot purchase from, lease to, or rent to a related party.
Cash Flow Certainty
Ensure your level of SMSF contributions and rental income are enough to cover all costs.
Your investments need to be aligned to your long-term plan to achieve your retirement goals. Do your homework and get the advice from a financial professional. Inside or outside of super, the entry costs to property purchased are high (e.g. stamp duty). Failure to seek advice early can lead to costly results later. A little focus goes a long way.
What should you do now?
Upcoming Webinar
Wednesday 27 October | 12.00pm – 12.45pm
Catch our webinar “Buying Property in Super” with Jason for a more in depth look into this topic.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2021. Please do not reproduce without the expressed written consent of the author.