Eligible Properties for SMSFs: A Guide for Property Investors
Investing in property through a Self-Managed Super Fund (SMSF) offers a unique opportunity to grow your retirement savings. However, not all properties qualify for SMSF investment, and strict compliance is required.
Types of Eligible Properties for SMSFs
A Self-Managed Super Fund (SMSF) is a private super fund that gives you full control over your retirement savings. Unlike traditional superannuation funds, an SMSF allows you to choose your investments, including property.
Commercial Properties
Commercial properties offer more flexibility for SMSF investments, especially for business owners.
Key Benefits:
- Related Party Transactions: Unlike residential properties, SMSFs can purchase commercial properties from a related party if sold at market value.
- Business Use: Members can lease commercial properties to their businesses under strict commercial terms.
Example: A small business owner can sell their office space to their SMSF and lease it back, creating a compliant income stream for the fund.
Residential Properties
SMSFs can invest in residential properties under certain conditions:
- Purpose: Must be used solely for investment purposes, not personal or related-party use.
- Vendor: Properties cannot be purchased from a fund member or their associates.
- Compliance: The property must meet the Sole Purpose Test.
Example: An SMSF can purchase a rental property to generate income but cannot buy a family home or holiday property for personal use.
Types of Ineligible Properties for SMSFs
Properties intended for personal or recreational use do not meet the Sole Purpose Test and are strictly prohibited.
Example: A beachfront property used occasionally by an SMSF member is considered non-compliant, even if rented out most of the year.
Redevelopment Projects
SMSFs cannot purchase properties for redevelopment if borrowed funds are used for construction or significant renovations.
Example: An SMSF cannot buy a property to demolish and rebuild as part of a development project.
Vacant Land
While SMSFs can purchase vacant land outright, they cannot use borrowed funds to acquire land intended for future development.
Example: An SMSF cannot buy a vacant plot of land to construct an investment property using an SMSF loan.
Residential Properties from Related Parties
SMSFs cannot acquire residential properties from fund members, their families, or related parties unless the property is business real property.
Compliance Tips for SMSF Property Selection
1. Conduct Thorough Due Diligence
Confirm property eligibility with your SMSF advisor or mortgage broker.
Ensure the property meets ATO compliance standards, including market valuation requirements for related-party transactions.
2. Understand Borrowing Rules
SMSF loans must comply with Limited Recourse Borrowing Arrangements (LRBAs), ensuring lenders can only claim the property purchased in case of default.
Tip: For a property valued at $600,000, an SMSF typically needs a 30% deposit ($180,000) and can borrow up to 70% ($420,000).
Learn more about SMSF Borrowing Rules.
3. Work with Professionals
Partnering with SMSF experts ensures that your property investments comply with regulations and align with your retirement goals.
Frequently Asked Questions (FAQs)
Can SMSFs purchase residential properties for personal use?
No, SMSFs cannot purchase residential properties intended for personal or related-party use, as it breaches the Sole Purpose Test.
Can SMSFs invest in commercial properties?
Yes, SMSFs can invest in commercial properties and lease them to related businesses under commercial terms.
Are there restrictions on buying properties from related parties?
Yes, SMSFs cannot buy residential properties from related parties but can purchase commercial properties if sold at market value.
Can SMSFs purchase holiday homes?
No, holiday homes do not qualify for SMSF investment as they fail the Sole Purpose Test.
Take the Next Step in SMSF Property Investment
At Lagos Financial, we provide expert guidance to help you navigate the complexities of SMSF property investment. From selecting eligible properties to ensuring compliance, we are here to assist at every step.