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SMSF buying personally owned IP

Discussion in 'Superannuation, SMSF & Personal Insurance' started by pestgirl, 8th Mar, 2010.

  1. pestgirl

    pestgirl SMSF novice

    Joined:
    28th Apr, 2009
    Posts:
    10
    Location:
    Windsor nsw
    HI again everyone
    I want to explore property again for our SMSF.
    We own a IP, and my question is can we use cash from our SMSF to purchase part of this existing IP and therefore pay out the loan.
    Property is worth approx $400K and our loan is around $100K
    So the idea would be to have 1/4 rent going into our super fund; with rest being owned by us.
    Obviously I need to get loads more advice - but I have a feeling that there will be a ruling saying that this is not possible.
    I was hoping that someone might know whether this is a path I can explore further...
    Thanks again :)
     
  2. Superman

    Superman Well-Known Member

    Joined:
    6th Nov, 2007
    Posts:
    343
    Location:
    Gold Coast, QLD
    Hi Pestgirl

    Common question you have asked in regards to a SMSF acquiring an investment property from the members.

    Unfortunately a SMSF is expressly prohibited from purchasing a property (or a % of the property) from the members unless it is business real property.

    An typical residential investment property does not fit into the 'business real property' criteria unless it is converted into an office or similar or you had a large number of investment properties and you ran your little empire in a business like manner (i.e. managed them yourself).

    An alternative strategy for you could be to utilise the equity (by my calcs about $220k @ an 80% LVR) in your existing IP and on-lend this to your SMSF. This is termed member finance or the 'BYO banker' strategy.

    Combining your existing SMSF cash with the monies you on-lend to your SMSF should hopefully give you enough to enable the purchase of a cash flow positive property that pays for itself and then some.

    To do this you would have to set up a special SMSF debt trust (aka property trust, custodial trust, bare trust, instalment warrant or instalment trust) and use that to purchase the property. You would also need the loan agreement and instalment agreement drawn up.

    You are correct - you will likely need to do more research and talk to an appropriate qualified SMSF specialist and crunch the numbers before deciding if this strategy is right for you.

    I hope this answers your question and provides some direction or ideas for you.

    Any other questions please ask.

    SM
     
  3. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
    you can only do it if it's business real property.