An increasing number of investors, and especially Baby Boomers, are using their Self-Managed Super Fund (SMSF) as a vehicle to get an investment property.

So I want to share a few of the most frequent mistakes I see people making so that you can avoid them.

Debt – Capitalise interests
Improvements include developments, granny flat, extensions etc.. For all these activities cash resources of this fund must be used. It’s critical to keep excellent records on your SMSF to determine whether borrowed funds or private money is used. When debt is used, the property must be held at a Holding Trust using a Corporate Trustee instead of directly in the SMSF.  Going with a trusted property management agency is crucial.

Aside from the legislative requirement to not hold the property in the SMSF there are actual and practical reasons why you wouldn’t need to keep it at the SMSF.

Associated Party Loan
Lots of men and women use external funds to assist them in buying property in their SMSF by contributing the money as a non-concessional contribution.

The thing is that once donated you can’t get the money back until retirement or worse still you can’t put in adequate funds within the allowable limits.

It is possible, however, lend the funds to your superannuation that permits its launch if refinancing and there’s not any limit on the quantity of the loan.

The mistake that a lot of people make is to give the funds using a simple loan agreement.

The loan agreement must satisfy the limited recourse borrowing requirements of the legislation in addition to clearly identifying all terms and conditions.

Renovations which only return the part to a new condition are categorised as ‘repairs’ for the superannuation borrowing laws.

Therefore a beautiful renovation, which replaces the modern kitchen or bathroom is allowable with borrowed funds.

The mistake often made is to enhance the kitchen by state extending the seat area or knocking down a non-load bearing wall.

Both are deemed to be improvements and has to use private SMSF money.

It’s a simple thing to ask your builder to divide the bill to show the progress as a distinct item of work which can subsequently be financed with money rather than borrowed funds.

When a property is demolished, and state a duplex is constructed or property is originally purchased, and then another contract to build is entered into than these are adjustments to the original asset and can’t be done inside the SMSF while there’s still an outstanding debt on the property.

Life Insurance
For the premiums to stay tax-deductible, they shouldn’t relate to the particular use to repay the debt.
Insurance to effectively attain the same outcome and be tax deductible is possible with the correctly worded SMSF and policy identification.

Stamp Duty
Many nations will charge stamp duty at the complete property transfer rate.
While the SMSF can buy a residential property from a non-related third party, it can’t buy a residential property from a member or connected person of the member.  Ensure you speak with the appropriate professionals to assist you in this process especially if it is related to commercial property sales.

An SMSF can, however, buy listed shares or real property (industrial and commercial ) from a member.

There’ll be CGT and stamp duty consequences to the sale, but regarding stamp duty most states allow for a minimum stamp duty if the property is in the individual’s title, and they’re also the SMSF member.