When the rules changed in 2007, and again in 2010, it became easier for investors to borrow money to buy assets in an SMSF. With the relaxation of these rules the opportunity to invest in property within an SMSF for retirement purposes took off.
The general rule covering borrowing to invest in an SMSF is that the borrowing must be by way of a limited recourse borrowing arrangement – am LRBA. What this means is that the lender only has recourse against the single property bought using the LRBA. This helps to protect the SMSF.
The rules also limit what the SMSF investor can do with the property once it has been bought into the SMSF. For example, you can use the LRBA to:
Repair your property
This could be to restore the property to its original state, or make good any defects or damage – think wear and tear, and accidental damage.
Maintain your property
This is work undertaken to prevent damage or defect.
You can’t use the LRBA to improve the property; in other words, update and change the use of the property significantly.
Allowable Repairs and Maintenance
You can, of course, paint the property, and decorate it. You can replace guttering, doors, and windows. None of this would alter the function of the house. But let’s suppose that the property was gutted by fire – you could replace the damaged kitchen, but you can’t improve the home beyond its original state by adding an extension.
Don’t change the property!
Under the rules, you can’t change the use of the property. This includes changing a single property into multiple properties:
- It might be tempting to buy a single plot of land, but it can’t then be divided into several titles.
- You won’t be able to demolish a home and replace with three on a single plot.
- But you can rebuild a house and add a garage to it: the main use of the house will not have changed.
- If the purchase is, for example, two blocks of land, it can’t be split into two titles.
- A vacant block of land with no property cannot then have a home built on it
If in doubt, shout!
The rules about repair, maintenance, and improvement are subject to objective appraisal, but are also subject to change. Before buying property into an SMSF, or undertaking any work to a property held within your SMSF, it is always best to check current rules and regulations. Failing to do so could negate the purchase and tax benefits of your investment.
A free consultation with an SMSF expert will help you decide your best course of action, and help you achieve your SMSF investment goals.