One of the most common questions from clients with a Self Managed Superannuation Fund (SMSF) is, can I buy property? Followed by the second question, can I buy property in the United States?
SMSFs provide investment flexibility for those that understand the rules. They can also be a significant liability if you get it wrong. There are a few key things to check before purchasing a property:
- The SMSF’s investment strategy and trust deed must allow for the purchase you are contemplating.
- You can’t purchase property from a related party (for example a relative or spouse) unless the property qualifies as business property (business real property to use the technical term).
- When you are exploring the viability of the property purchase, be aware that the SMSF cannot lease the property to a related party (again, unless it is business real property). For example, you can’t have your kids living in the property even if they pay market rate rent.
- Your SMSF needs to have the cashflow and liquidity to purchase the property.
- Factor in transaction costs such as stamp duty into your planning.
Australian SMSFs can purchase property in the US if it is correctly structured (you will need good legal and structuring advice). The question is, should you invest your retirement savings in a market where you have limited visibility or knowledge?
A SMSF would not usually acquire US property directly.
Generally, the fund would structure the property investment through a Limited Liability Company (LLC) where the SMSF (and its associates) own and control the majority of the “membership” (the shares). The US LLC is likely to be required to lodge a tax return and pay US federal and state taxes.
As the actual investment the fund holds is the interest in the company (with the company owning the property), there are in-house asset issues to consider. One issue is that the company bank account needs to be with an entity that is classified as an Authorised Deposit Institution (ADI) – not all foreign banks are. Fail this criteria and the investment held by the SMSF may become an in-house asset and require the fund to sell the asset.
If you’re thinking about purchasing property in your SMSF, talk to us today about achieving the right structure and outcome.