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Property investing with super saves tax, but beware of the wolves

August 24, 2017

WINDS of change have been blowing through superannuation but fortunately for real estate lovers, they haven’t slammed the door shut on some lucrative property investment strategies.

Last month’s super rule overhaul mainly targeted wealthy retirement savers, and still, allows people to buy direct property in their own self-managed super fund.

This will cost more to finance and set up than buying real estate outside of super, but the potential tax benefits can far outweigh the initial costs.

Firstly, how does paying no capital gains tax sound?

If you start a SMSF and buy a house with it, selling the house after age 60 when in your fund is in pension mode means you avoid paying any CGT. This tax is usually slapped on half of investors’ capital gains an can cost hundreds of thousands of dollars for properties sold a decade or two after purchase.

The new super rules introduced a cap of $1.6 million of assets per person in a tax-free pension, which limits the number of homes that will be able to sit in a retiree’s tax-free super pension fund.

Business owners have used SMSFs for many years to buy their business premises, and then rent it from their own super fund. However, residential investors are not allowed to have related parties such as family members living in their SMSF-owned properties.

Related article: Small investors using Self Managed Super Funds 

Interest rates for property loans in SMSFs also are higher, bigger deposits are required, and the fund will need enough money to afford all the usual property running costs.

Another potential drawback is concentrating too much wealth into one asset class — residential property. While houses have made many people millionaires over many years, having traditional super assets such as shares, bonds and real estate investment trusts helps diversify a person’s overall wealth.

And remember that lurking behind the latest super winds of change is the Big Bad Wolf — also known as the Federal Government, which has been tightening super and property investment rules, and the Labor Party which takes an even harsher stance.

Future government changes may turn a solid brick investment strategy into a flimsy house of straw, so avoid putting all your financial eggs in the property-SMSF basket.

Most experts recommend SMSFs require at least $200,000 to make them cost-effective after administration and auditing fees are considered, and if the property in an SMSF is your aim perhaps aim for $300,000-plus. Remember that up to four members of a family can combine their super in a SMSF.

Super remains the best tax shelter for saving for retirement, even if you’re lucky or wealthy enough to have assets worth more than $1.6 million in the future. Amounts above that will need to be put back into a regular super fund — rather than a tax free super pension fund — but these regular funds still pay lower tax than what’s charged outside super.

The forecast for Australia’s superannuation system is for continued windy weather, but that shouldn’t deter savers from at least considering a marriage between real estate and super.

Source:Perth Now

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