As a Self-Managed Super Fund (SMSF) trustee, navigating the world of property investment can be a challenging task. With complex rules and regulations for both residential property as well as commercial property within your SMSF, it's no surprise that many trustees find themselves questioning whether they can renovate their SMSF-owned properties. In this article, we'll dive into the world of SMSF property renovations, breaking down the rules and providing helpful tips to ensure your renovation journey is a success.
Why Consider Property Renovations for Your SMSF?
Many SMSF trustees are drawn to property investments due to their tangible nature, as opposed to less tangible financial instruments like shares and bonds. The allure of property investments within SMSFs has grown since changes in superannuation laws allowed SMSFs to borrow through a loan structure called a Limited Recourse Borrowing Agreement. However, it's important to understand the rules and regulations surrounding property renovations within an SMSF before diving in.
Renovating SMSF Commercial Property and Residential property
Outright Ownership vs. SMSF Borrowing
The freedom you have to renovate your SMSF-owned property depends on how it was purchased. If your SMSF bought the property outright, you have more flexibility to renovate, subdivide, or develop the property, as long as it's allowed under your SMSF deed. However, if your SMSF borrowed money to buy the investment property and the loan is still outstanding, your renovation options are more limited.
Repair vs. Improvement
Borrowed funds can be used for repairs, but not for improvements. Repairs restore a property without altering its character, while improvements add value or functionality. To avoid breaching regulations, make sure you understand the difference between the two before proceeding.
Avoiding the "Replacement Asset" Trap
Renovations that create a "replacement asset" are not allowed if your SMSF still has an outstanding loan. A replacement asset is created when the property's function or purpose is fundamentally changed, or when the property's legal rights are altered, such as through a subdivision or title change.
DIY Renovations: Proceed with Caution
Unless you're a licensed and qualified professional offering these services to the public, you cannot perform the renovations yourself. If you do meet these criteria, your SMSF can hire you or your company at market rates, but the SMSF must purchase all materials directly to avoid acquiring assets from a related party.
A Smooth Renovation Journey with the Right Guide
Investing in property through your SMSF can be a rewarding experience, but it's important to be aware of the potential pitfalls and navigate the rules and regulations carefully. With the right guidance from experts, like our team of specialist SMSF Credit Advisers, you can confidently embark on your SMSF property renovation journey, armed with the knowledge to make the most of your investment.
Call us now at 1300 799 702, or click here to book a no-obligation Discovery Call. We’ll help you navigate the rules around your SMSF investment property’s renovation!
