The decision to purchase property through an SMSF requires careful consideration.
Even so, using an SMSF to buy an investment property has become more popular.
You may have picked up various advantages to purchasing an SMSF, but have no idea where to start when evaluating the risks.
What regulations do you have to comply with? Can you live in the SMSF property that you purchase? Or could you use it to run your small business from?
Because this area of property investment can get a bit tricky, we’ve put together this ultimate SMSF property buying guide to help you decide whether it’s a suitable option for you.
What Is a Self Managed Super Fund?
In terms of Australian law, your employer must put money aside on your behalf into a superannuation fund while you are working. This ensures that you can have an income once you’ve retired.
However, if you would prefer to manage the account yourself, you can opt to use a self-managed superannuation fund (SMSF).
An SMSF is a private superannuation fund that you can manage by yourself, rather than having it managed by a superannuation provider. An SMSF allows individuals to take control of their retirement savings by making private investment decisions.
Your SMSF can have up to four members, all of whom are also considered trustees. If the fund has more than one member, each trustee will equally be responsible for the decisions made about the fund as well as its compliance with relevant laws.
The purpose of an SMSF is to give the member more control over their superannuation by allowing them to decide:
- how much money is paid into it; and
- where and how much of it is invested.
One of the benefits of being in control of your SMSF is that you can use it as a vehicle to buy an investment property.
Benefits of Investing in Residential Property through an SMSF
Investing in residential property through a Self-Managed Super Fund (SMSF) can provide numerous benefits for fund members.
One of the primary advantages is the potential for long-term capital growth and rental income. Residential property values tend to appreciate over time, providing a steady increase in wealth for fund members.
Additionally, rental income from residential property can provide a regular stream of income for the SMSF, helping to offset loan repayments and ongoing property management fees.
Another benefit of investing in residential property through an SMSF is diversifying the fund’s investment portfolio. Fund members can reduce their reliance on traditional investments such as shares and bonds by including residential property in the portfolio. This can help to minimise risk and increase the potential for long-term returns.
It’s also worth noting that investing in residential property through an SMSF can provide tax benefits. Rental income from residential property is taxed at a maximum rate of 15%, and capital gains tax liability can be reduced through a Self-Managed Super Fund. This can help increase fund members’ net wealth and provide a more comfortable retirement.
What Are the Costs Associated With an SMSF?
There are various factors to consider when deciding to opt for an SMSF. One crucial factor is cost.
There is a wide variety of costs associated with starting up the SMSF and managing it each year. It’s highly recommended that you consult industry professionals such as accountants and lawyers to ensure you meet the compliance regulations.
Costs can include:
- start-up fees, which include the costs of obtaining a trust deed;
- legal fees;
- advice fees;
- stamp duty;
- bank fees;
- Annual management fees such as the SMSF levy collected by the Australian Tax Office (ATO), independent audit fees as well as the costs used to produce a tax return; and
- Investment management fees.
According to the ATO’s Self-managed super funds: statistical overview 2023–24, SMSFs with assets between $200,001 and $500,000 had an average total expense ratio of 4.4%. The average operating expense ratio for funds in the same asset range was 1.3%.
For this asset range, the ATO recorded average total expenses of $15,477 and median total expenses of $7,388.
Example:
If an SMSF held $360,000 in assets, applying the average total expense ratio would produce the following illustrative calculation:
$360,000 × 4.4% = $15,840
This is an illustration based on an average ratio across an asset range, not an estimate of what a particular SMSF will cost. Actual expenses depend on factors such as the fund’s investments, borrowing, insurance, administration arrangements and professional advice.
The ATO’s total-expense measure includes a broader range of costs than basic operating expenses. Its operating-expense measure covers audit fees, management and administration expenses, the SMSF supervisory levy and certain other reported amounts.
Can Your SMSF Afford to Buy an Investment Property?
Before purchasing an investment property through a Self-Managed Super Fund, it’s essential to consider whether the fund can afford the investment. This includes considering the fund’s cash flow, loan repayments, and ongoing property management fees.
Fund members should also consider the minimum balance required to purchase an investment property through an SMSF. Typically, a balance of at least $200,000 to $500,000 is required to be economically viable. This is because the fund will need to cover the deposit, loan costs, property expenses, and loan repayments.
It’s also crucial to consider the loan repayments and whether the fund can afford to service the loan. Fund members should ensure that the rental income from the property will be sufficient to cover the loan repayments and ongoing property management fees.
What Are the Laws Around SMSF Compliance?
SMSFs are required to comply with Australian superannuation legislation. Most importantly, the SMSF (as with all super funds), must be set up for the sole purpose of providing retirement benefits to its members.
Properties purchased through an SMSF cannot be the primary residence of a fund member or their related parties, ensuring compliance with the sole purpose test.
Trustees (members) are consequently responsible for ensuring that their SMSF satisfies the ‘sole purpose test’ and that it complies with obligations proposed by the legislation, such as:
- developing an investment strategy and acting per that strategy;
- in preparation of the investment strategy, members must consider taking out appropriate insurance cover for each member;
- only accepting contributions to the SMSF from the members:
- monitoring the total SMSF balance and transfer caps;
- appointing a registered auditor to complete the annual audit;
- trustees may also need an SMSF property valuation report to support the property’s market value for annual financial statements, audits and regulatory compliance;
- maintaining the necessary administration and record-keeping;
- ensuring the member has met a condition of release before they can withdraw from their SMSF; and
- lodging the SMSFs yearly tax return with the ATO.
If members fail to fulfil their responsibilities, the ATO is empowered to impose various penalties.
What Factors Should You Consider Before Buying a Residential Property With Your SMSF?
If you are considering purchasing property with your SMSF, you should take note of the following factors, namely that:
- You and your related parties (such as your relatives and the other members and trustees of the fund) can’t live in or rent a residential property your SMSF owns.
- You can’t acquire the SMSF property from related parties or other trustees.
Example 1:
Brad and Susan Locke are trustees of an SMSF.
After doing thorough research and consulting with an advisor, they have decided that they would like to purchase an investment property using their SMSF.
Susan’s brother, Jacob, is selling an investment property he owns on the Gold Coast.
However, to comply with the regulations, Susan can’t purchase Jacob’s investment property because the SMSF can’t buy a property owned by anyone related to the trustee.
Buying commercial property through your SMSF
Your SMSF isn’t limited to residential property. It can also buy commercial property, as long as the purchase meets the sole purpose test (it must be only for providing retirement benefits to members). For example, if you run a business, your SMSF can buy your business premises and your business then pays rent to the fund. The rent must be the market rent that similar properties earn: you can’t set a cheaper rate to favour your business.
While purchasing residential property poses some limitations, commercial property, on the other hand, allows for some more flexibility. Before you buy, work through our SMSF commercial property checklist.
A commercial investment property can be leased to a more extensive list of tenants, provided that it’s solely used to conduct business.
Where qualifying business real property is acquired from a related party, an SMSF property valuation can help document that the purchase price reflects market value and the transaction is conducted on arm’s-length terms.
Borrowing To Purchase Your SMSF Property: Loan Repayments
Since 10 August 2026, a new limited recourse borrowing arrangement (the only way an SMSF can borrow to buy an asset) can only be used to buy business real property, such as premises used in a business. This means an SMSF can no longer borrow to buy a residential property. Borrowing set up before that date, and refinancing of it, can continue (Treasury Laws Amendment (Tax Reform No. 1) Act 2026, Schedule 5). Read more about the SMSF borrowing changes. However, strict conditions govern the lending process.
Borrowing money must be done using a limited recourse borrowing arrangement (LRBA). LRBA involves establishing a separate property trust to hold the purchased investment property on behalf of the SMSF.
While the property is held outside the actual SMSF structure, any return on investment gets added to the fund, and any expenses incurred from the property are deducted directly from the fund.
All loan repayments are similarly made through the SMSF. If the SMSF fails to meet the repayments, the bank can only access the investment property held in the separate trust as recourse. No other assets belonging to the SMSF will be affected.
You should recognise the following vital factors if you’re considering borrowing money to purchase an SMSF property:
- generally, the SMSF fund needs to have an existing minimum balance of $120,000 to be able to buy property;
- you will need to make an annual contribution to your SMSF of at least $15,000;
- banks often charge a higher rate of interest on a loan obtained by your SMSF; and
- in most cases, banks require the SMSF to have at least 30% of the property’s value available to use as a deposit. Contact us for an SMSF property valuation.
What Are the Capital Gains Tax Consequences of Buying an SMSF Property?
One of the benefits of purchasing an investment property with your SMSF fund is the tax breaks available to you as a trustee:
- You are only required to pay a 15% income tax on the rental income from your SMSF property. This is well below the marginal tax rates, which could amount to 45%, depending on your income threshold.
- Investment properties that are held by the SMSF for longer than 12 months qualify for a capital gains tax (CGT) discount on the sale of the property. Your CGT liability will only be 10%. You can also further reduce your CGT liability by ordering one of our capital gains reports.
- Once you retire and the fund starts paying out your pension, any rental income or capital gains resulting from SMSF property will be tax-free.
- If you borrowed money to purchase your SMSF property, the interest payments are tax-deductible to the fund.
Can You Claim Tax Depreciation for an SMSF Property?
As with any other property investment, SMSF members qualify to claim depreciation deductions for capital works as well as plant and equipment items in your SMSF property.
To make the most of the deductions available to your SMSF property, you should consider having a quantity surveyor draw up a depreciation schedule to ensure that you maximise all your property depreciating claims.
Find out more in our guide to tax depreciation for SMSF properties.
Renovating Your SMSF Property
Renovating a property purchased through a Self-Managed Super Fund can greatly increase the property’s value and rental income. However, it’s essential to consider the rules and regulations surrounding renovations in an SMSF.
Simple repairs and maintenance of the property can be paid for using borrowed money. However, significant improvements or renovations to the property must be funded by available cash already held within the super fund and not by the loan or borrowed money.
Fund members should also consider the potential impact of renovations on the property’s value and rental income. Renovations can increase the property’s value, but they can also disrupt rental income and increase ongoing property management fees.
Purchase the Property in the Correct Name
When purchasing a property through a Self-Managed Super Fund, it’s essential to ensure it is purchased and held in the correct name. The property must be purchased and held in the name of the trustee of the bare trust.
Before signing the contract, an independent pre-purchase property valuation can help confirm whether the proposed price is supported by current market evidence.
Failure to purchase the property in the correct name may lead to expensive stamp duty implications. Fund members should ensure that the property is bought and held in the proper name to avoid any potential penalties or fines.
It’s also worth noting that the property must be held in the name of the trustee of the bare trust rather than the individual fund members. This is to ensure that the property is held solely to provide retirement benefits to fund members.
SMSF property FAQs
Can My Self-Managed Super Fund Buy Property?
Yes, your self-managed super fund (SMSF) can buy property as an investment. Some key things to keep in mind:
- The trust deed should state that the property is held for the sole purpose of providing retirement benefits for fund members.
- All members of the SMSF must agree to the purchase.
- Since 10 August 2026, a new SMSF loan can only be used to buy business real property, so a residential property must be paid for with the fund’s own money. Loans set up before that date can continue.
How Much Deposit Is Required for SMSF Property?
There is no set minimum deposit in the law. Since 10 August 2026, an SMSF can’t take out a new loan to buy a residential property, so it must pay the full price from the fund’s own money. A new loan can only be used to buy business real property, and the lender decides how much the fund must put in. Loans set up before 10 August 2026 can continue.
What Is the In-House Asset Rule for Self-Managed Super Fund?
The in-house asset rule limits the percentage of assets an SMSF can invest in related parties. No more than 5% of the total SMSF asset value can be loaned to or invested in related parties, such as fund members, their relatives and associated businesses. This includes property purchases. Business real property leased to a related party at market rent doesn’t count towards the 5% limit. Fines apply for breaching the in-house asset rules.
Does an SMSF Pay Capital Gains Tax?
Yes, an SMSF is generally required to pay capital gains tax (CGT) on any net capital gains it realises from selling assets like shares or property. An SMSF must include all capital gains and losses in its assessable income each year, and a net capital gain is taxed at the concessional rate of 15%. If the fund has held the asset for at least 12 months, it gets a one-third CGT discount, so the gain is taxed at an effective 10%.
Key Takeaways
Simply put, an SMSF is a type of superannuation fund you manage yourself instead of having a provider manage it on your behalf. This allows you to decide how you would like to manage your fund and what property you would like to invest in using the fund.
Further advantages include various tax breaks. Since 10 August 2026, an SMSF can only take out a new loan to buy business real property, not a residential property.
However, managing an SMSF comes with immense responsibility, so it isn’t necessarily suited for all individuals.
With the complex and strict compliance regulations in place, it would be a good idea to seek qualified and experienced advice if you are considering investing in residential or commercial property through your SMSF.
If you’ve decided to purchase an SMSF property after consulting with an advisor, you must make the most of the tax benefits available to you.
For example, members qualify to claim depreciation deductions on their SMSF property.
The Duo Tax team of quantity surveyors are registered tax agents who aim to help property investors make every dollar count. Whether you own a residential or commercial property, we have the expertise to help you make the most of your depreciation deductions.
Access our free depreciation calculator here to see what you can potentially claim on tax depreciation.
Alternatively, get in touch with one of our Duo Tax Quantity Surveyors today to see how you can maximise your tax return.
