Real estate obsession brings super benefits if played right
THE love affair that Australians have with property as an investment can provide real benefits, depending on the age and stage of life of the owners. It can also lead to property being owned by a self-managed superannuation fund. Owning a property in an SMSF can provide benefits depending on the type of property and the age of fund members.
THE love affair that Australians have with property as an investment can provide real benefits, depending on the age and stage of life of the owners. It can also lead to property being owned by a self-managed superannuation fund. Owning a property in an SMSF can provide benefits depending on the type of property and the age of fund members.The most common form of investment property is residential. A popular strategy is for the high-income-earning and high-taxpaying member of a couple to negatively gear a rental property. In this situation, a tax loss is made that produces a tax refund.Under this strategy the investor is seeking to generate large capital gains from the property. For the strategy to work, the capital gain needs to exceed the combination of the original purchase cost and the accumulated net after-tax holding cost of the property.It is also not uncommon for people who use this strategy to pay off the mortgage on the property over several years so that they can receive the rental income in retirement. In some cases super funds are withdrawn to pay off loans. This results in the income received being fully taxable and the income received is much lower than other investments.Another disadvantage of the strategy is that at some point capital gains tax will be payable, either when the property is sold by the original investor or when it is sold on their death. It is best to anticipate these problems and put in place strategies to deal with them.One strategy is to sell the investment property after the owner has retired and before they turn 65. This will mean the tax payable on the capital gain can be reduced by making a self-employed super contribution. In addition, the net proceeds can be paid into a super fund as a non-concessional contribution to produce a tax-free income in retirement.A big problem of having a negatively geared property in a super fund is the drain on the cash flow of the SMSF. This occurs because the rent received is much less than the expenses, including loan repayments. This means most of the contributions, or investment income, are used to meet the cash-flow shortfall rather than increasing superannuation benefits.Even if no borrowings have been used to buy a residential property, cash-flow problems can occur for a super fund when members start pensions.This results from the net rental income of residential property in most cases being less than 3 per cent, while the minimum pension payment requirement is at least 4 per cent of the value of the property.The longer a property is held by the fund, the more other investments must be sold to meet the minimum pension payment requirements. The cash-flow problems can be compounded for an SMSF when there are long periods of either rental arrears or no tenants.It therefore also makes sense for the trustees of an SMSF to plan to sell a rental property. The best time for this is after pensions have started as no capital gains tax will be payable.A property strategy that can be very effective for an SMSF is when the members want to retire to a location that is different from where they now live. This results in the super fund buying a property at today's prices that is later transferred in specie to the members on their retirement.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free