SMSF and Property in it - Benefits

[paulz]

I'm researching at setting up a SMSF - primarily to buy an Investment Property in it for my wife & I.

Strategy is to be a long term hold until retirement (15-20 years away).

Who believes in the long term benefits of this over buying it in your own name..

Pros-
-CGT benefits after retirement - no CGT

Cons
- SMSF fees
- no negative gearing tax benefit.

 

[alexlee]

Strategy is to be a long term hold until retirement (15-20 years away).

That's the thing. When the asset is in a super fund, you don't get to decide when to retire. The government decides when you can retire (or at least get the income / assets out of super without penalties).

 

[Aaron_C]

You can't negative gear an SMSF but you mitigate that by using low gearing and buying higher yielding properties.

 

[Terry_w]

SMSFs can negatively gear just like individuals can. But a loss in a SMSF cannot be used to offset your own personal income (just as a loss on my property cannot be used to offset your personal income).

 

[Aaron_C]

SMSFs can negatively gear just like individuals can. But a loss in a SMSF cannot be used to offset your own personal income (just as a loss on my property cannot be used to offset your personal income).

Obviously that's what the OP meant - otherwise why would he even raise it as a 'con'?

 

[alexlee]

Are SMSFs allowed to be in a net taxable loss position at the end of the financial year?

 

[paulz]

That's the thing. When the asset is in a super fund, you don't get to decide when to retire. The government decides when you can retire (or at least get the income / assets out of super without penalties).

>> Are you saying if retirement age is 67 - then that's when it becomes CGT free.?

 

[Aaron_C]

>> Are you saying if retirement age is 67 - then that's when it becomes CGT free.?

No what he's saying is that the government unilaterally controls when your 'retirement' age is. So you can't decide when it happens until you reach that age.

 

[Terry_w]

Are SMSFs allowed to be in a net taxable loss position at the end of the financial year?

I believe so. But don't forget the 9% SGC is income to the trust as is rent. But if you add up all the depreciation etc it could end up with a taxable loss.

 

[geoffw]

Are SMSFs allowed to be in a net taxable loss position at the end of the financial year?

Losses from an SMSF can be carried forward to offset any gains. They may be gains from sales of other assets, such as shares, from income produced from the property, or ultimately from selling the property. Of course, in real terms, the value of those losses diminishes over time.

Two other points about a property in an SMSF:

1. You cannot use the property yourself- unless it is a business property used by your business. You could not buy a holiday property and stay there for two weeks.
2. You can't leverage increase in the property's value to buy more property without selling it.

 

[paulz]

So - does it make sense to have an IP in a SMSF or not?

 

[RPI]

I like it if
-you are self employed or high income and are pumping money into your SMSF anyway

The leveraging is what makes the difference.

D

 

[geoffw]

It can make sense if you have money in the SMSF and you don't like shares.

 

[Terry_w]

So - does it make sense to have an IP in a SMSF or not?

Makes sense.

Imagine your smsf puts in just 20% deposit and it gets a cashflow neutral/positive property which is negatively geared. The fund is not paying anything out of its pocket except for the 20%, but is getting to hold a property which should be increasing in value each year. If held long term then it could be paid for by retirement. Any rental income and capital gains could then be tax free.

You would still be able to use the rest of your SMSF funds to invest in other areas such as fully franked shares where your fund can benefit from the franking credits.

 

[GaryT]

The strategy can be very useful.

I.e. assume you hold an IP in your own name and it has a $10,000 net tax loss. Then you save the tax on that $10,000 of income.

Now assume that same property is in the SMSF and that same loss is in the SMSF (no problem negatively gearing in an SMSF). But say you make an extra concessional contribution of $10,000 into the SMSF to cover the loss. The net result to your personal tax is the same.

In the SMSF this contribution offsets the net rental loss so no contributions tax is paid saving 15% on the $10,000 - a double benefit.

When it comes time to sell the IP you will be in pension phase so no CGT but even if you sell it before pension phase the CGT is only 10%. This means that you get all the advantages of claiming the Div 43 Building Depreciation without having to add it back for CGT purposes - a triple benefit

 

[Terry_w]

The strategy can be very useful.

I.e. assume you hold an IP in your own name and it has a $10,000 net tax loss. Then you save the tax on that $10,000 of income.

Now assume that same property is in the SMSF and that same loss is in the SMSF (no problem negatively gearing in an SMSF). But say you make an extra concessional contribution of $10,000 into the SMSF to cover the loss. The net result to your personal tax is the same.

In the SMSF this contribution offsets the net rental loss so no contributions tax is paid saving 15% on the $10,000 - a double benefit.

When it comes time to sell the IP you will be in pension phase so no CGT but even if you sell it before pension phase the CGT is only 10%. This means that you get all the advantages of claiming the Div 43 Building Depreciation without having to add it back for CGT purposes - a triple benefit

Excellent points Gary. Triple benefits!

 

[alexlee]

The two biggest negatives with the super fund is 1) hard, if not impossible, to re-finance to buy more, and 2) preservation age. Whether this is acceptable depends on strategy and your circumstances (especially age, and when you expect / plan to have enough to retire.

 

[paulz]

The two biggest negatives with the super fund is 1) hard, if not impossible, to re-finance to buy more, and 2) preservation age. Whether this is acceptable depends on strategy and your circumstances (especially age, and when you expect / plan to have enough to retire.

---
I'm only looking to hold 1 property in SMSF and long term - so I suppose it will be at least until the "preservation age" 65/67

 

[Aries]

I have some questions on this matter, if I may ask.

1. Is it worthwhile to set up an SMSF solely to hold one property?

2. Will the benefit of ownership in SMSF outweigh the set up cost plus ongoing annual costs (like accounting, legal, etc if any)?

3. In terms of asset protection, how does SMSF compare to trust?

Thank you.

 

[Terry_w]

I have some questions on this matter, if I may ask.

1. Is it worthwhile to set up an SMSF solely to hold one property?

2. Will the benefit of ownership in SMSF outweigh the set up cost plus ongoing annual costs (like accounting, legal, etc if any)?

3. In terms of asset protection, how does SMSF compare to trust?

Thank you.

1. depends.
2. depends.
3. SMSF is generally stronger.