SMSF SMART STRATEGY: Purchasing retirement home with borrowing

[manoj]

One strategy which is hardly ever used by SMSF trustees : Purchasing your retirement home by your SMSF using borrowing.

Most people do not want to live in their current home after they are 65, so instead of purchasing your retirement home when you get to 65 - it can be cheaper if you buy it now (say if you are 40 - 50) about 25 years earlier - then when you are ready to retire - all you have to do is sell your PPOR and simply move into the property owned by your SMSF.

The above strategy is perfect, however Section 71 of the SIS Act - "In- house assets" does not allow trustees or related entites to lease a residential property owned by the SMSF.

To counter Section 71, all the member of the SMSF has to do is purchase the property from the trustees of the SMSF when he / she is ready to move into the property. Care should be taken on how this happens - as SMSF gets only 1/3rd discount and not 50% discount - however if the SMSF is in pension phase - the property can be sold by the SMSF to a related party without paying any CGT.

Provided the member has cash to pay for the property, as the property cannot be paid as a "pension" to the member as some silly rule that all pensions have to be paid in cash.

If the member does not have enough cash - all he has to do is borrow the money from the bank for one minute - pay the SMSF - get the property out - then get the cash out as a pension the next minute and return the loan to the bank. Note a pensioners over 60 do not have to include pensions in their income tax returns.

Gold Coast!, here i come....

 

[BV]

Hi Manoj

Good to see you're still around and full of good ideas....

 

[jingo]

One strategy which is hardly ever used by SMSF trustees : Purchasing your retirement home by your SMSF using borrowing.

I fail to see the advantage of using this strategy. Are you able to expand further?

Wouldn't be advantageous to buy a property outside a SMSF and use it to leverage into more assets?

 

[BV]

I fail to see the advantage of using this strategy

What if you use your SMSF as an additional way to acquire property?
You can keep on investing outside super but when you run out of equity you then turn to your SMSF and make your SMSF's money work harder by gearing it?

 

[Terryw]

What about the stamp duty and CGT on the transfer.

Wouldn't it be better to purchase the final home in the names of the individuals, rent it out, claim the negative gearing, and then sell their PPOR tax free on retirement and just move into the investment property?

The SMSF could still be used to aquire properties and other investments.

 

[jrc]

What about the stamp duty and CGT on the transfer.

Wouldn't it be better to purchase the final home in the names of the individuals, rent it out, claim the negative gearing, and then sell their PPOR tax free on retirement and just move into the investment property?

The SMSF could still be used to aquire properties and other investments.

Another advantage of terryw's suggestion is that you could leave the holiday house to your heirs and as it will have become your poor it could be totally cgt free

 

[alexlee]

Guess it's a problem if you want something 'new' for your retirement.

If you have money in your super and want to buy property, fine. To specifically choose a place you want to live in when you retire really limits your options. You then run the risk of wanting to buy a place where you want to live regardless of whether it's actually a good investment or not.

Invest well, without tying yourself to emotional decisions like buying your 'dream retirement', and you can buy whatever you want when you do retire.

 

[coastymike]

Agreed. Have never understood this strategy. Retirement is a long way off for those that would warrant using this strategy and within that time the area may change, the building becomes older, views are blocked, etc requiring you to sell. Or you simply decide that the beach isn't where you want to be as the grandkids and your kids have moved interstate and you wanT to be near them. Plus the stamp duty on transfer. To me this is just a sales pitch and not much else.

 

[alexlee]

If you have money, you're not going to lack for a 'retirement home'. Therefore, the investment plan should be a monetary goal, tempered by your own risk profile (if the two don't match, you either lower your goals, or learn how to handle more risk).

 

[Aaron_C]

If you have money, you're not going to lack for a 'retirement home'. Therefore, the investment plan should be a monetary goal, tempered by your own risk profile (if the two don't match, you either lower your goals, or learn how to handle more risk).

I agree with this. Your tastes/priorities change over time so it would be a bit presumptious to know exactly which house you would want to retire to. Not everyone wants a beach house in Portsea

 

[alexlee]

When all you have is a hammer, everything looks like a nail. And you get into weird situations like trying to convince someone to use a hammer to knock down a tree because a hammer is the best tool ever and you risk cutting yourself by using a saw.

 

[birchcorp]

Yes agreed, it may not be a strategy used by everyone. But there are many who through Manoj's advice may take a strand of the strategy on board. Most importantly, it is the many variations to this strategy and the use of SMSF borrowing and SMSF's in general, that make SMSF's a very lucrative topic and investment vehicle. SMSF's are not going away. In fact they are the largest single Superannuation platform (ahead of both retail super and industry funds).

The analogy of a hammer does not reflect an SMSF. You cannot simplify god's gift to investing with such a narrow view. Ask any person in retirement, and they will tell you the years got away. Plan early, start young and you will enjoy retirement with far more than anticipated. It will come around and the odds suggest you will be there- well 85% of us anyway. Remember most people cannot afford to invest outside of the super environment due to cash-flow restrictions. SMSF, is the solution to help with this problem -regardless of whether or not you want the home for retirement or simply to sell as an asset.

Investing isn't what is was ten years ago, you have to be dynamic to do well with finances now and in the past. I look forward to twenty-thirty years from now to see the variations on the people who did invest via SMSF vs those that didn't. I know for a fact that my position has improved since the SMSF borrowing and the enhanced development of strategies in an SMSF.

I understand Manoj has an agenda as we all do in life? But my suggestion is to embrace his knowledge, test him further and that way he may be inclined to give us more? I do not see the sense in being blutantly negative. i.e A good question would be how realistic is it to get that money as a refinance for the one minute that you are discussing? i.e. is this practical from a lenders point of view of are we looking at a high cost with lenders that charge us a premium?

 

[Peter_Tersteeg]

I agree with this. Your tastes/priorities change over time so it would be a bit presumptious to know exactly which house you would want to retire to. Not everyone wants a beach house in Portsea

I'll take a beach house in Portea any day. Right across the road from the dive shop

In pension phase the SMSF won't pay CGT, but stamp duties would still be payable. I guess you could justify this as a cost of business.

I think I'll buy one in Portsea and get my dive buddy to buy the one next door. We can then rent them to each other.

 

[Terryw]

Manoj,

Hope you haven't been scared away. Please keep the strategies coming.

 

[MIW]

Great choice using SMSF!

One strategy which is hardly ever used by SMSF trustees : Purchasing your retirement home by your SMSF using borrowing.

Most people do not want to live in their current home after they are 65, so instead of purchasing your retirement home when you get to 65 - it can be cheaper if you buy it now (say if you are 40 - 50) about 25 years earlier - then when you are ready to retire - all you have to do is sell your PPOR and simply move into the property owned by your SMSF.

The above strategy is perfect, however Section 71 of the SIS Act - "In- house assets" does not allow trustees or related entites to lease a residential property owned by the SMSF.

To counter Section 71, all the member of the SMSF has to do is purchase the property from the trustees of the SMSF when he / she is ready to move into the property. Care should be taken on how this happens - as SMSF gets only 1/3rd discount and not 50% discount - however if the SMSF is in pension phase - the property can be sold by the SMSF to a related party without paying any CGT.

Provided the member has cash to pay for the property, as the property cannot be paid as a "pension" to the member as some silly rule that all pensions have to be paid in cash.

If the member does not have enough cash - all he has to do is borrow the money from the bank for one minute - pay the SMSF - get the property out - then get the cash out as a pension the next minute and return the loan to the bank. Note a pensioners over 60 do not have to include pensions in their income tax returns.

Gold Coast!, here i come....

Manoj,
Keep ideas coming. I'm in my forties and hubby and I run our SMSF since 1995and we have been quite successful, so we heard somewhere about this strategy but didn't really know how it works, its specifics.
I also note some miss the point as you talked about being in the pension mode not accumulation (you draw income from Super) so don't be too concerned with the comments.
We have number of options/choices of what to do, but are unsure at this stage. We have 3 IP Super investments (no loans) which generate positive income and are able to buy another 2 for cash outright, or 4 more with borrowing and additional 50% via Super. That way Super rentals would pay out the 50% loan without any additional contributions. Other option was to buy via Super just one property for cash, close to home, so we could downgrade later on, by selling our PPOR and living in the same suburb. PPOR would be land tax/capital gain tax free.
Couldn't the SMSF property be treated like off market transfer? In our case the sale of PPOR would be enough to buy it out for cash but it may be better to do what you suggested, buy it with loan and pay it off via Super in pension mode.
So what do you do with the sale proceeds of PPOR? Direct it to our IPs bought outside Super to increase cashflow (so too higher tax) to live off it in retirement?
Most comments about investing outside Super assume that their PPOR and IPs are paid off or close to it approching retirement, but what if you want to start living off them? The choices are to sell few, draw equity to live off once you have a big porfolio or pay some of via this option thanks to Super. Great choice!
You could do this all the time if you say had 3 properties in your Super and you wouldn't need to sell the IPs outside of Super as they would generate CGT.
Good thinking....

 

[MIW]

Other option to investing is via SMSF

I fail to see the advantage of using this strategy. Are you able to expand further?

Wouldn't be advantageous to buy a property outside a SMSF and use it to leverage into more assets?

Yes, while you are young in the accumulation stage of your life, but what if you had some investments in your SMSF too?... OR, you were approching say retirement within next 5,10, 15 years so perhaps you do not wish to invest outside Super and be so negatively geared....OR have total control over Super even if you are not approching retirement and invest in both entities...
Statistics also show most baby boomers are downgrading their PPOR so he's quite right (e.g. kids grew up & left home, too big, too much gardening, wish to travel, help kids with money, etc...)

 

[MIW]

Other options for SMSF

What about the stamp duty and CGT on the transfer.

Wouldn't it be better to purchase the final home in the names of the individuals, rent it out, claim the negative gearing, and then sell their PPOR tax free on retirement and just move into the investment property?

The SMSF could still be used to aquire properties and other investments.

Woldn't most of the money from PPOR then go into paying off this negative gearing property? If it was positive you would loose its potential rental income you were receiving and what if you wished to sell it down the track as you decided not to like living there. The CGT would be triggered for the time you rented it out? Is that correct? Whereas in Super I think you eliminate that and can do it as many times as many properties you have in Super?

 

[MIW]

Agreed. Have never understood this strategy. Retirement is a long way off for those that would warrant using this strategy and within that time the area may change, the building becomes older, views are blocked, etc requiring you to sell. Or you simply decide that the beach isn't where you want to be as the grandkids and your kids have moved interstate and you wanT to be near them. Plus the stamp duty on transfer. To me this is just a sales pitch and not much else.

The same could happen to your PPOR and IP that you bought.....

 

[MIW]

If you have money, you're not going to lack for a 'retirement home'. Therefore, the investment plan should be a monetary goal, tempered by your own risk profile (if the two don't match, you either lower your goals, or learn how to handle more risk).

Money is not everthing, money can loose it value, investments can become more expansive to acquire. Everthing is relative....
So why do around 85% of people that retire go onto government pension? I do not wish to be that statistics, and I hopefully won't be but for majority it would imply we should not be ignorant to choices, even if it means investing or using Super as other alternative vehicles....

 

[Terryw]

Woldn't most of the money from PPOR then go into paying off this negative gearing property? If it was positive you would loose its potential rental income you were receiving and what if you wished to sell it down the track as you decided not to like living there. The CGT would be triggered for the time you rented it out? Is that correct? Whereas in Super I think you eliminate that and can do it as many times as many properties you have in Super?

Hi MIW,

The PPOR could be sold tax free. Ideally you could purchase an IP while young - one that you may want to live in when retired. Rent it out and on retirement sell the PPOR and use this to pay off the IP loan. The IP would be subject to CGT up to the period it becomes the PPOR. But CGT is only payable on the sale. This can be reduced to a certain extent by decreasing your taxable income. being retired may mean low income so lowish tax.

In the meantime all your other investments and left overs from the PPOR sale would be used to give you some nice tax free income.

Just 1 idea.