Tempted to sell because prices are high? First check your timing, then the loan and what you’re going to do with the proceeds.
Well written piece by Ben Smythe in the Australian Financial Review.
With the residential property market on an upward spiral, investors holding property assets in self-managed superannuation funds are wondering whether the time is right to sell or hold.
With any investment decision of this nature, it is wise to consider the consequences or implications so you are not basing your decision on a projected sale price.
Before you continue, If you want to learn more about superannuation as a whole, refer to the section ‘Superannuation’ in our latest e-book. If you want help with Superannuation or a Self Managed Superfund just let us know in the contact form towards the bottom of this page.
First, the tax consequences of selling a property in your SMSF are important, particularly if you are approaching retirement. Selling while drawing a pension from your SMSF will allow for any capital gain to be disregarded if your member balance is within the transfer balance cap.
If the property has been specifically segregated to your member balance or account, and there is more than one member in your SMSF, any sale proceeds will relate only to your transfer balance cap.
Importantly, the transfer balance cap is increasing by $100,000 from July 1, so a sale in the next financial year could allow more of the capital gain to be disregarded if your member balance already exceeds $1.6 million.
The timing of when you start a pension during the year and sell the property is also important if your SMSF has a mixture of pension and accumulation assets. This might be due to your member balance being above $1.6 million or one member being in pension and another in accumulation.
In this instance, an actuarial certificate will be required for your SMSF to ascertain the exempt pension income for the year, which will take into consideration any capital gains from a property sale.
You will need to make sure your pension is in place before you sell the property, and ideally in pension for the whole year if you have a mixture of pension and accumulation during the year, to maximise the tax-effectiveness.
If your existing property asset is supported by a borrowing in your SMSF, you should also consider the consequences of selling the property and paying back that loan. The market for bank loans to SMSFs has changed dramatically from when these loans first became available, with most of the large banks no longer offering an SMSF loan facility.
If you sell the property and pay back the loan, the reality is that you may not be able to secure another loan for any future property purchase, and your ability to have leverage within your SMSF will be lost.
The other consideration for SMSFs when they have a property asset with an attaching loan is the restrictions on contributions.
If there is a related party loan in place that started after July 1, 2018, or you have a limited recourse borrowing arrangement in place after that date and you are now in pension phase, the outstanding loan balance will count towards a member’s total super balance.
Where this is greater than $1.6 million, no further non-concessional contributions are allowed for that member.
If you are getting close to retirement, part of your plan might have been to boost your superannuation with after-tax contributions via the bring-forward provisions. Alternatively, you might have been planning to make large after-tax contributions to pay down the debt and increase the income from the property in retirement.
In both these cases, selling the property now and extinguishing the loan will allow these plans to be implemented if the loan amount is eating into your total super balance.
Finally, with any asset sale, you need to consider what you will do with the proceeds. For example, is your plan to better diversify your SMSF or are you confident of achieving higher future returns from exposure to an alternative asset class?
Don’t simply be persuaded by what the real estate agent is telling you. Ensure selling the property makes sense from an investment and retirement planning perspective.
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