You are permitted to own real estate in your SMSF, however there are rules you need to abide by that you need to consider before purchasing.
- You cannot acquire the property from a related party.
- You cannot live in the property, neither can family or friends.
- You cannot do any capital improvements. This means for example that you cannot develop property or turn a 2 bedroom house into 3 bedroom house etc.
- If you have a mortgage for the property, it must be positively geared. This means that the rent income must be enough to more than cover all the costs related to the property like mortgage payments, insurance, management costs, maintenance costs etc.
SMSFs in general cannot have any debt, so if you require a mortgage to purchase the property, you need to set up a bare trust which will hold the property and the mortgage. A bare trust is an entity that sits next to your SMSF. The bare trust acts as a firewall between the mortgage and everything else. So if the property ends up losing value, or going to zero, the banks cannot try to chase the debt from the SMSF or you personally. For this reason banks usually require at least 40-50% as a deposit and interest rates are higher than normal home loans.
You can purchase a commercial property as well as residential property. If you have a business, the business can rent the commercial property back from your SMSF. However, your business must rent the property at an arms-length agreement. This means your business must rent the commercial property for market value – exactly the same figure as if it were leased on the current market. There can be no missed payments, no discounts or skipped dues. Your business must pay your SMSF as though it were a regular landlord.
See the ATO website for carrying on a business with your SMSF: https://www.ato.gov.au/super/self-managed-super-funds/investing/carrying-on-a-business-in-an-smsf/
Setting up a Bare Trust
If you require a bare trust established you need the following…
- A separate company to your SMSF trustee company. The company can be established any time before the purchase of the property.
- A bare trust. The bare trust will be established either before or after the purchase contract is signed. When to establish the bare trust will depend on the state where the property is located.
The company can hold multiple bare trusts but you will need a separate bare trust for each mortgaged property held by the SMSF.
- We can set up this structure and assist in the process for $1800.
- Annual ASIC fees will apply (currently $263 per year per property)
- New Brighton Capital accounting fees apply ($220 per year per property).
- You will also be required to pay for a formal property valuation to be completed on the property every other year.
If you would like to set up a bare trust to purchase real estate in your SMSF please add the following information to the message section of your online portal…
- Name of new proposed company
- Name of new proposed bare trust
- Confirm residential address of all directors
- Address of investment property
- Purchase price (approx is fine)
- Deposit amount (approx is fine)
- Commercial or residential
- Existing or off the plan
- Estimated rental income
- Witness details for e-signing docs (salutation, first name, last name and email)
- Are you borrowing from an external lender (such as a bank) or an internal lender (such as a related party)?
- Name of the mortgage broker, bank loan officer or related party providing the loan
- Contact details of mortgage broker, bank loan officer or related party providing the loan (phone number and email)
- Ensure you confirm with your mortgage broker the rules regarding stamp duty (state specific) when transferring from bare trust into SMSF.
- Does the new bare trust need to be stamped by the state revenue office?
The following provides a summary of each state and the timing requirements for signing and dating the holding/bare trust deed and signing the purchase contract: THIS INFO IS SUBJECT TO CHANGE SO MAKE SURE YOU CONFIRM THIS INFORMATION WITH YOUR REAL ESTATE AGENT and MORTGAGE BROKER BEFORE MAKING A PROPERTY PURCHASE OR ESTABLISHING A BARE TRUST.
- Investment property located in NSW, TAS or ACT – the purchase contract must be signed and dated before signing the holding trust deed.
- Investment property located in SA, QLD or NT – the purchase contract must be signed and dated after signing the holding trust deed.
- VIC, WA – you can sign the purchase contract and holding trust deed in any order