Is it possible to use the equity in SMSF property to buy more?

Is it possible to use the equity in SMSF property to buy more?

Being a property investor and being a Self Managed Superannuation Fund trustee are two different things, especially if you are planning property investments that involve borrowing to invest. SMSF borrows through a limited recourse borrowing arrangement or LRBA. This structure has special rules that permit the usage of SMSF assets as security against any other investment. Hence, using the equity in the property investment to finance another property is prohibited.

The establishment of a bare trust is required in addition to the SMSF’s trustee arrangement. It can be a bit costly but worth the expense. The main feature of an LRBA defaults on the mortgage. The majority of lenders require SMSF trustees to provide personal guarantees that they will pay between the mortgage debt and property sale value. You cannot offer your house as secure as it will be considered as a member providing financial aid to the SMSF.

Once the SMSF repays the loan, the bare trust will collapse under the title of property transferred into the SMSF because it will be owned by the fund instead of the lender. Talking about the future investment options, you can collect the existing property rent and other income to establish a cash pool for another property purchase. This pool has to be at least 20 to 30 percent of the new property’s value. Again, a new purchase will require a new bare trust at a cost of around $500 – $700.

LRBA can only be applied to a single asset. Hence, your existing limited recourse borrowing arrangement can only apply to your current property. This also means you are unable to access the equity in your current property. Also, you cannot move to another lender who is providing you more funds than the amount outstanding in your existing investment.

According to the LRBA rule, borrowed money must only be applied to obtain a single investment, although a new loan can be taken to replace the existing LRBA loan. If you are planning to get equity from the first investment property to purchase the next investment property, you have to realise the equity by selling the first investment property and using the amount to purchase another property.

This would require careful contemplation of the associated tax implications, like capital gains tax, with your tax adviser. You can also sell the first investment using fund investment income and contributions to make a sufficient amount for the next investment, be it an outright purchase or a new LRBA.

A proposed property investment, just like any other investments in SMSFs, would be covered under the general super investment rule. A sole purpose test and the investment strategy might be required for the property investment. Having an issue in the investment strategy is a potential lack of diversification in any proposal because such purchase will further distillate the portfolio in the property. Contact SMSF Loan Experts today, our expert team is always ready to help you in buying property etc.

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Matthew Yuille

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