Hi Tammy, I have heard that I can use a self-managed super fund (SMSF) to borrow and buy residential property. Can I live in this property if I pay rent? Alex,
Beacon Hill
Hi Alex,
With the cost of buying or renting a home skyrocketing, the idea of using your super to secure somewhere to live is very appealing. Unfortunately, residential property owned by your SMSF cannot be rented to a related party. This prohibits you from living in the property, even if you pay market rent.
There are, however, ways you can use a SMSF to help you invest in residential property:
- Your SMSF can borrow to purchase a property through a limited recourse borrowing arrangement (LRBA). This loan may be funded by a bank or related party. Until the LRBA ends, the property can be maintained but not renovated or improved.
- You can buy a property jointly with your SMSF as tenants in common or using a unit trust. You can borrow to fund your share, but you cannot use this property as security for your loan.
General restrictions on the acquisition and personal use of the residential property still apply, but using a SMSF may assist you to purchase property you could otherwise not afford. You could later buy the property from the SMSF to use as your residence, but the SMSF cannot buy the property from you.
There are also limited circumstances when you can use a property owned by your SMSF:
- If you operate a business, your SMSF can purchase premises for your business to rent at market rates. Known as business real property, the property must be wholly and exclusively used by one or more businesses. Generally, you are still prohibited from using the property for personal purposes.
- There is a specific carve out for primary production land, that is land used in a primary production business. Up to two hectares of this property, including dwellings, may be used for personal purposes.
As with any investment made by a SMSF, the property purchased must fit the fund’s investment strategy and sole purpose of building wealth for retirement. Detailed cash flow planning is also essential to ensure the SMSF can meet ongoing expenses.
This is a complex area. For every rule I have outlined, specific requirements or exceptions may apply. Careful consideration and specialist advice is essential.
Quick Tips: A SMSF is an expensive structure to set up and run. You bear trustee responsibility and significant penalties can apply if you get it wrong. Plan for potential risks, such as cash flow shortfalls if the property is vacant, or you are unable to work and contribute. You must transfer ownership out of the SMSF before you move in, even if you have retired. Transferring ownership may incur capital gains tax, conveyancing and stamp duty costs. First home buyers should consider the First Home Super Saver Scheme.
Feel free to call me on 8376 0350 if you have any further questions or need assistance.
Regards, Tammy
Tammy Marshman and Up Wealth Sydney Pty Ltd are Authorised Representatives of Consultum Financial Advisers Pty Ltd, AFSL number 230323, an Australian Financial Services Licensee.
This is general information only, as in preparing it we did not take into account your personal objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate for your personal circumstances. Although the information is considered reliable, we do not guarantee that it is accurate or complete and you should not rely upon it.
Please seek financial advice specific to your situation before making any financial, investment or insurance decision.
