Is it worth buying property through super?

If you’re looking for an enticing investment option, you may be considering if it’s worth buying property through super? While it has the potential to offer long-term financial growth and security, like any investment strategy, it comes with its own set of advantages and challenges.

At First Financial, advising on borrowing to buy property through super is one of our services. It is an extremely popular investment strategy. So, here’s what you need to know.

Investing in property through your superannuation requires utilising a self-managed super fund (SMSF) to purchase residential or commercial real estate assets. This strategy allows you to leverage your existing balance to acquire this property, diversifying your investment portfolio to secure future income streams.

One of the key attractions of buying property through super is the tax benefits on offer. Rental income generated from this asset is taxed at the concessional superannuation tax rate, which can be significantly lower than the personal income tax rates. Additionally, if the property is held within your SMSF until retirement, any capital gains realised upon its sale may be tax-free.

However, it’s essential to weigh these potential benefits against the regulatory requirements and risks associated with property investment through super. The Australian Taxation Office (ATO) imposes strict rules and limitations on SMSFs engaging in property transactions, including restrictions on borrowing and prohibited transactions with related parties.

Historically, property values have appreciated over time, making property investment a reliable option likely to result in long-term capital growth, wealth accumulation, and ultimately, the ability to live off tax-free rental income in retirement.

Additionally, the mentioned taxation benefits are particularly attractive. Rental income in your SMSF enjoys a concessional tax rate, capped at 15%. In contrast, individual ownership subjects taxes to personal rates, potentially reaching 47%, while corporate ownership incurs a fixed 30% tax rate.

Regarding capital gains tax (CGT), special superannuation tax rates apply to any increase in the property’s value.

Depending on when the property is sold, any capital gain may be entirely tax-free. During the ‘accumulation’ phase, the fund typically pays CGT of up to 10% on property growth after at least 12 months of ownership. Conversely, if the property is sold during the ‘pension’ phase, capital gains are completely exempt from tax.

While there is some regulatory and compliance complexity involved, there are other challenges to consider before committing to borrowing to buy a property through your superannuation fund.

Property is an illiquid asset, meaning it may be difficult to sell or access the funds tied up in real estate quickly, particularly in times of financial need. Also, investing a significant portion of your retirement savings in property may lead to overexposure to a single asset & single asset class, potentially increasing your risk.

At First Financial, our team specialises in superannuation advice, including SMSF management and buying property through super, and we can help you assess whether this strategy aligns with your financial goals and risk tolerance.

Seeking professional advice before making significant financial or retirement decisions is essential, as individual circumstances greatly influence the suitability of any strategy. A financial adviser can assess your specific situation and guide you in determining whether this approach is right for you.

Whether you’re a seasoned investor or exploring property investment for the first time, our experienced financial advisers can help you navigate the process to ensure the best possible outcome for your financial future.

A Limited Recourse Borrowing Arrangement (LRBA) is a borrowing arrangement permitted within SMSFs, enabling the fund to borrow to acquire assets such as property or shares. Importantly, it limits the lender’s recourse to the asset purchased.

This means that in the event of default, the lender can only claim the asset acquired with the borrowed funds and not other assets within the SMSF. LRBAs are subject to strict regulations set by the ATO and require careful consideration and professional advice before implementation.

If you’re wondering whether it’s worth buying property through super, the answer is dependent on your personal goals and current financial status. That’s why seeking professional advice is so crucial.

Despite the advantages, LRBAs come with a host of rules and regulations. Our team, led by LRBA expert Ben Rossi, has extensive experience navigating these intricacies, and we ensure a smooth process for our clients.

For personalised guidance on retirement planning, superannuation and SMSF matters, contact our expert team today.

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