Buying and holding property in a self-managed super fund has never been more popular.
It certainly makes sense for trustees to consider investing in property in their SMSF. There can be significant tax advantages, not to mention the opportunity to diversify the fund’s investment portfolio.
Promoters of borrowing to buy property in an SMSF have certainly had a role to play in increasing the numbers of super funds holding property, rightly or wrongly. Limited recourse loans are great for some, but not a strategy that fits all.
Whether investing in commercial or residential property, special rules apply when buying a property in your SMSF. Even the most experienced property investors can find it easy to make mistakes.
Here is a list of the top five mistakes I see every day:
1. Transferring your residential property into your SMSF
If you own a residential rental property, you cannot sell or transfer it into your self-managed super fund. The only property your SMSF can buy from you or any of your relatives is “business real property”- property used wholly and exclusively in a business.
2. Registering property ownership
It is very important that the property is registered in the name of the trustee company or individual trustees of the SMSF with the relevant state land titles office.
Alternatively, if the property was purchased using a limited recourse loan, the legal title should be held by the trustee of the bare trust, not the trustees of the super fund. If the property is registered in any other name, you should seek immediate legal advice to correct the land title records.
3. Leasing residential property to members or their relatives
Only commercial property can be leased to related party tenants.
NEVER let any member or relative of a member rent a residential rental property from your SMSF. In fact, don’t let members or their relatives use your SMSF’s residential rental property at all, whether they pay rent or not. This includes holiday houses.
4. Failing to collect rent from related party tenants
It is a common strategy for an SMSF to buy a commercial property and lease it back to members for their business.
It is also an extremely common mistake for the business to forget to sign a written lease agreement and/or forget to pay rent.
Rent must be paid by the business to the SMSF on commercial arms-length terms. So I recommend obtaining a rental valuation, documenting a written lease agreement, and ensuring rent is physically paid to the SMSF monthly in advance.
5. Borrowing without the right documents in place
When you borrow to buy property in your SMSF, there is a series of important documents that must be put in place. The loan must be a limited recourse loan, and the property must be held under a bare trust arrangement. Seek advice from a specialist SMSF advisor before borrowing in your super fund to make sure you get these documents right.
If in doubt, ask your auditor! There is no reason you have to wait for the end of the year to show your auditor what you’ve been up to. If you want to get it right first time, communicate with your auditor and make sure you get your strategy right before you finalise anything.
NB: On Monday Tony Negline examines some common mistakes when it comes to stamp duty.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.