The value of owning an investment property has the potential for greater gains than only rental income and potential financial growth. Purchasing an investment property with borrowed funds from a Self Managed Super Fund (SMIF) has the capacity to lower income tax on returns and capital gains tax (CGT) on the investment. However, purchasing a property with borrowed funds should not be entered into lightly.
One of the first steps in purchasing an investment property should be to make sure that owning an additional residence is the right investment for your position. Some key things to consider:
Do you meet the criteria?
The regulations for SMSF members to use borrowed funds to purchase investment properties have changed in recent years. These changes have paved the way for investment property to be a more attainable option for many members, however the strict guidelines should be researched thoroughly to ensure you are aware of your individual situation.
Is the risk too high?
This question may seem simple, yet there are numerous things to consider before purchasing an investment property. Using SMSF borrowed funds places limitations on what the money can and cannot be used for. Some questions to ask yourself are:
- What is your financial capacity to undertake improvements and repairs not covered by SMSF borrowed funds?
- Are you in a position to hold the property for upwards of ten years if the market declines?
- What will happen if the property remains vacant for a long period of time considering you cannot occupy the property yourself?
The Next Step
Once you have decided that property ownership is the most practical investment choice for your lifestyle and financial position looking towards the future is possible. Developing a strategic approach to all of the investments held within your SMSF is vital. Using the limited recourse borrowing arrangement (LRBA) will help guide your choices and ensure a valuable portfolio.
In many cases the revenue earned from positively geared investment properties is taxed at the SMSF rate of 15%. The low rate is often substantially less than many individual’s nominal tax rate and an incentive to many prospective property investors. Income earned once commencing a pension is often tax-free and may prove a further asset to your portfolio.
The current regulations leave the potential to avoid CTG altogether if the property is sold after beginning the aged pension. This may provide an additional incentive to procuring an investment property with the hopes of long-term financial benefit.
As with all investments, research of your individual position and limitations helps clarify what is best for your current and future position.
This article was written in collaboration with Mark Ribarsky, Senior Buyers Advocate and owner of Wise Real Estate Advice. To find out how you could benefit from an experienced buyer’s agent, visit the Wise Real Estate Advice website.