What type of property for smsf property investment

Yes but only Macquarie will do it.

 

No equity releases/cashout possible under SMSF lending which highlights the importance of IO and offset within the an offset.

Even though both the AMP and St George products were more expensive than say Macquarie - they were often the preferred product due to the offset.

 

An off set in an offset??? Besides this being the matrix can you please explain?

 

No, the only way to release equity is to sell.

 

The other thing to bear in mind with the type of property, often being sought for as new for reasons of low maintenance (which is fine) and depreciation benefits (which is flawed). SMSFs are only paying 15% tax - so depreciation benefits are of limited use inside a SMSF compared with a purchase outside the fund in an individual's name, who might be on the highest marginal rate of tax.

 

Yep definitely went matt damon there - i meant "an offset within an SMSF".

 

Hi ripas

Have you gone with personal trustees or corporate trustee for your SMSF? Most lenders will insist on corporate trustee.

 

No you can't. The rules are quite specific about one mortgage, one asset. That's why commercial property that can be future developed with accumulated funds within the SMSF is popular. If you're buying residential, the cash flow positive, reasonable CG unicorns that come along are attractive.

Buying a renovatable house or adding rooms to residential can also be done, but unless you are increasing your rental income markedly, the funds can be better invested elsewhere.

Renovation is also a minefield as you are limited to how much work you can do yourself before the ATO get interested and decide that you are inadvertantly contributing to your super via labour.

 

As others have said, no you cannot release equity. The only way to access equity in a SMSF property is to sell it, thereby crystalizing the gain. In theory you then split your pile of money in two (or more than two piles depending on the gain) and use these cash piles to fund deposits and buying costs on subsequent purchases.

 

It doesnt have to be new but lower maintenance and reasonable cf seems to be the best fit for many of my clients. Of course they also want cg (who doesnt) but 3% yeilds dont make for easy loans with the banks these days the cf has to be strong to keep them happy particularly if you plan to buy more than one.

 

Are you able to elaborate more on the depreciation for SMSF? Are you saying that investing in new properties is less beneficial as the depreciation you would usually get from those properties are not realised due to the lower tax rate?

 

Yes, not as beneficial, from a tax perspective only.

 

There are so many reasons why a residential investment property should not be in a SMSF and I strongly urge you to seek financial advise relevant to your circumstances.

 

Great article from Melissa Browne re SMSF http://www.theage.com.au/money/supe...-smsf-property-plan-work-20150806-gisqd0.html

SMSF property rules
Monica, from the TV show Friends, once said rules are there to make the game more fun but that's not necessarily the case when it comes to property and SMSF. If you breach a rule the consequences are expensive and potentially irreversible, so it's important to know what they are and to follow them to the letter.

The most important rules to understand when it comes to property and SMSF are:

• The property must not be acquired from a related party of a member (unless it's commercial property).
• The property must not be lived in by a fund member or any fund members' related parties.
• The property must not be rented by a fund member or any fund members' related parties (but a related business can rent a commercial property).

The exception is with business premises, as a related business owner can sell to and/or rent a commercial property owned by an SMSF.

This means your SMSF can potentially buy your business premises, allowing you to pay rent directly to your SMSF at the market rate. It's often an attractive option and one of the most common ways to own property in an SMSF.

SMSF borrowing rules
An SMSF is allowed to borrow to acquire property if, once again, specific and strict criteria are met. What's important to understand is that banks are becoming more and more stringent with both the criteria they are following and the size of the deposit required.

That's if they're willing to lend to an SMSF at all. Some of the borrowing rules include:

• The property must be held in a bare trust whose trustee must be different to the SMSF trustee. A bare trust is a trust where the title holder holds the property for a specified beneficial owner (in this case the SMSF trustee).
• Each borrowing arrangement must only be used to buy a single asset, for example a residential or commercial property.
• The borrowing must be non-recourse, which means the lender cannot go after any other fund assets other than the property that was bought with the funds borrowed.

Once you understand the rules it's still important to weigh up the positives and negatives of following this particular strategy. And there are quite a few of both. The main negatives when it comes to SMSF and property are:

• Higher Costs SMSF Property loans tend to be more costly than other property loans (unless you are borrowing personally and on-lending to the SMSF).
• Cash Flow Loan repayments must be made from your SMSF, which means your fund must always have sufficient funds to meet the loan repayments.
• Hard to Cancel If your SMSF property loan documentation and contract is not set up properly, unwinding the arrangement may not be allowed, which means the property must be sold.
• Can't borrow to improve the property Borrowed funds can be used to maintain a property but can't be used to improve a property.
• Lower LVRs (loan valuation ratios) If borrowing directly from a bank, there are lower LVRs that banks will use, which is typically 70-80 per cent for residential and 60-70 per cent for commercial properties, so a bigger initial deposit is required.
• Arrangements must be commercial If your business is renting commercial premises owned by your SMSF and you are unable to pay rent, you may need to evict yourself in order to remain a complying fund.
• Equity not available You can't use the equity in one property as a deposit for another property or to reach LVRs, as each property must stand on their own.

While the main advantages for holding property in an SMSF are:

• More money into super All Australians are limited by the amount of contributions they can make into super but particularly by buying your business property in the fund, there is the opportunity to contribute more to super through rents paid.
• Capital gains free asset This is one of the biggest and most attractive advantages. If a property is sold by an SMSF after fund members have retired, then all profits made on the sale of the property are CGT free.
• Rents are tax free If a property is kept by an SMSF after fund members have retired, then all profits made on the rental of the property are tax free and monies drawn by the member of the fund as income are also tax free.
• Lower income tax rate If properties bought in the fund are positively geared, the profits are taxed at the fund's income tax rate, which is a maximum of 15 per cent (or 30 per cent for high-income earners).

Still interested? Make sure you don't just rush in but instead talk to an accountant or planner who is a licensed SMSF specialist before making any decisions.

A great accountant will be able to financially model for you the best place to hold your property so you can make an informed decision as to whether SMSF and property are right for you.

 

I have another option. We are looking at buying a fruit tree farm with the intent of running it as a business. The property has a residence on the farm. After reading the ATO rules I interpret that the purchase should meet the "wholly and exclusively" test.

https://www.ato.gov.au/Super/Self-m...ctions-on-investments/Business-real-property/

So the business then leases the property through the SMSF.

Now its just an idea but would this enable me to use my super and have no mortgage. Surplus funds could then be directed into other IP's?

 

I am interested to hear what are the reasons?

It can be a very powerful strategy done the right way.

 

No. The only way to access equity in a property held inside a SMSF is to sell it.

 

Just to clear up some of the confusion about lending:

• Lenders will generally insist on the SMSF having a corporate trustee.
• Many SMSF lenders have now gone to 70% LVR for residential property, however there are still players at 80% LVR and based on the original post in this thread it sounds like ripas' SMSF has enough cash in it to tick their minimum balance qualification criteria.
• Commercial property purchases require a substantially bigger deposit.
• SMSF lenders generally will insist on a minimum rental yield to assure themselves of the SMSF's ability to service the loan, so tread with caution regarding buying expensive property in the inner ring, since its yield is likely to be low and fail the serviceability test.

 

Bill Will, no you are not allowed to access equity in a property owned by a SMSF even if it increases in value.

You also cannot use equity in one SMSF owned property to buy another.

 

If you then sell the property in order to release the equity, do you pay standard CGT?