Purchasing an Investment Property Through Your SMSF

What Is a SMSF?

A Self-Managed Super Fund (SMSF) is a private superannuation fund that you manage yourself, rather than relying on a retail or industry super fund to manage on your behalf. 

With a SMSF, you become the trustee of your own fund, which means:

• You control where your super is invested.
• You can invest in assets like property, shares, and cash. 
• You’re responsible for ensuring the fund meets all legal and compliance requirements set by the ATO.

SMSFs can have up to six members, which is why many Australians set them up with a partner, family members, or business partners to pool superannuation balances. 

‍

How Does Buying Property Through a SMSF Work?

When your SMSF purchases an investment property, the fund owns the property, not you personally. This is an important distinction. 

The general process looks like:

1. Set up your SMSF - Establish the fund with a trust deed and appoint trustees. 
2. Roll over your super balance - Transfer your existing super into the SMSF.
3. Build the deposit - The SMSF needs sufficient funds to cover the deposit, stamp duty, and associated purchasing costs. 
4. Apply for a Limited Recourse Borrowing Arrangement (LRBA) if needed - If the fund can’t cover the full purchase price, it can borrow money through this specific loan structure. 
5. Purchase the investment property - The SMSF settles on the investment property and becomes the legal owner. 
6. Collect rental income - Rent flows back into the SMSF and is taxed at the concessional super rate of 15%. 

‍

What Is a Limited Recourse Borrowing Arrangement (LRBA)?

An LRBA is the only approved way for a SMSF to borrow money to purchase an asset like an investment property. It’s a loan structure specifically designed for super funds. 

Key features of an LRBA:

• The lender’s recourse is limited to the asset being purchased - if the fund defaults, they can’t come after any other of the SMSFs assets. 
• The investment property is held in a bare trust (also called a holding trust) until the loan is fully repaid. 
• Once the loan is paid off, full ownership transfers to the SMSF. 

Not all lenders offer LRBA loans, and the lending criteria are generally stricter than standard investment loans, so working with experienced professionals when going through this process is important.

‍

What Are the Rules Around SMSF Property?

The ATO has strict rules governing what a SMSF can and cannot do with property. Getting this wrong can result in serious penalties. 

Key SMSF property rules include:

• Sole purpose test: The investment property must be acquired and maintained solely to provide retirement benefits for members. 
• No personal use: Members, their relatives, or related parties ( friends, business partners) cannot live in or rent the residential property, even for a holiday. 
• Restrictions on related party purchases: Generally, a SMSF cannot purchase residential property from a related party (member or associate). 
• Commercial property exception: SMSFs can purchase business real property (commercial/industrial/retail) from a member at market value. It can also be leased back to a members’ business, provided it is at market rates. 
• Renovation limits: Significant, structural improvements or renovations cannot be made using borrowed money. 
• No access to capital growth: You cannot use the rise in property value (equity) of a SMSF investment property to borrow money for further investments. 

The property can:

• Be a residential investment property rented to unrelated tenants.
• Be a commercial property (with different rules - business owners can lease commercial property back to their own business through their SMSF).

‍

What Are the Tax Benefits of Buying Property in Super?

This is where the SMSF strategy becomes particularly attractive for long-term property investors. 

• Rental income is taxed at just 15% inside the SMSF (compared to your personal marginal tax rate, which could be up to 47%). 
• Capital gains are taxed at 10% if the investment property is held for more than 12 months. 
• If the investment property is sold while the SMSF is in the retirement phase, the capital gain can be completely tax-free. 
• Costs such as interest on loans, council rates, insurance, and repairs are generally deductible against the rental income. 
• Owners can claim depreciation on building structure and fixtures, reducing taxable income. 

‍

What Are the Risks and Considerations?

SMSF property investing isn’t for everyone. It’s important to go in with a clear picture of both the opportunities and the challenges. 

Things to consider:

• Upfront costs are higher - Setting up and running a SMSF involves accounting, auditing, and legal fees each year. 
• You need a sufficient balance - Most financial professionals suggest a minimum of $200,000 - $500,000 in super before a SMSF becomes cost-effective. 
• The fund must remain liquid - The SMSF needs enough cash to cover ongoing expenses, loan repayments, and member obligations. 
• Compliance is your responsibility - As trustee, you’re accountable for keeping the fund compliant with ATO regulations each year. 
• Equity cannot be extracted - Unlike purchasing an investment property in your personal name, you cannot extract equity from a property in your SMSF to fund another property purchase. 
• Property cannot be sold easily in a hurry - Unlike shares, property is illiquid and cannot be sold quickly and easily if the SMSF needs to pay benefits or expenses quickly. 

‍

Is SMSF Property Investing Right for You?

SMSF property investing works well for people who:

• Have a sufficient super balance to make it cost-effective.
• Are looking to diversify beyond traditional super investments. 
• Understand the long-term nature of property as an asset class.
• Want greater control over their retirement wealth strategy.
• Are comfortable taking on the responsibilities of fund management (with the right advisors).

‍

Start With the Right Strategy

Understanding how buying property through your super works is just the first step. The next is figuring out whether it fits your personal financial situation, goals, and timeline. 

At Search Property, we help Australians navigate property investing decisions with clarity and confidence. 

Ready to explore your options? Book a FREE investment assessment with Search Property. We'll discuss your budget, goals, and strategy to ensure you're investing in assets that actually build wealth.