Residential Property in SMSF

Editorial Team
May 7
3 min read

Updated: Oct 29

Self-Managed Super Funds (SMSFs) can include residential investment property in their portfolios, but only under strict regulatory constraints.

Trustees must ensure that all acquisitions, use, and disposals adhere to superannuation law. Additional rules apply when property is residential rather than commercial, especially around usage and related parties. Understanding these unique requirements is critical for compliance.

Prohibited Use

When an SMSF holds a residential investment property, trustees must never allow that property to be used by members, relatives, or other related parties for private purposes, such as living or holiday accommodation.

This rule is part of the prohibition on providing present-day benefits to members. Even indirect benefits, for example, letting a family member live at a discount are prohibited. The property must be held genuinely for investment, not personal use.

Buying Residential Properties

An SMSF must generally avoid acquiring residential property from related parties of the fund. The rules permit residential-property acquisition only in very limited circumstances if strict conditions are met, but in practice trustees typically avoid related-party deals for residential property.

For commercial property, related-party acquisitions are possible under certain conditions, including that the transaction is at market value and on an arm’s-length basis. Trustees should obtain independent valuation and retain documentation to support the fairness of any such transaction.

Structuring and Borrowing via LRBA

Residential property can be acquired using a Limited Recourse Borrowing Arrangement (LRBA). Under this arrangement, a separate holding trust (bare trust) holds legal title until the SMSF repays the debt. The SMSF (through the trustee) remains the beneficial owner and receives rental income and pays all expenses.

Because the SMSF cannot directly borrow, the LRBA is essential. Trustees must ensure that all repayments, expenses, and rental income flow through the SMSF bank account in compliance with regulations.

Repairs, Improvements and Asset Maintenance

Trustees should distinguish between repairs and improvements. Repairs that restore the property to its prior condition are generally allowable expenses paid by the SMSF. However, improvements or renovations that materially change the property’s value or character may require consideration of fund strategy, borrowing rules, and whether the SMSF has sufficient liquidity. Trustees must ensure these capital works do not breach borrowing constraints or place the SMSF into undue risk.

Disposition of Residential Property

When selling a residential property held by the SMSF, trustees must do so on arm’s-length terms. While selling to related parties is not outright prohibited in all cases, it must comply with law and be at market value.

Net proceeds from the sale must be remitted to the SMSF and cannot provide immediate benefit to a member outside the fund. Trustees should also consider capital gains tax consequences and whether the fund is in accumulation or pension phase.

Compliance and Practical Considerations

Residential property in an SMSF introduces heightened scrutiny. Trustees must ensure strict adherence to the sole purpose test, related-party rules, and property usage restrictions. Lending conditions may include additional trustee guarantees, and trustees should verify that property valuations, rental returns, and expenses are defensible.

Because compliance risk is high, many trustees engage professional guidance from accountants, lawyers, or valuation experts when dealing with residential property transactions in an SMSF.

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DISCLAIMER: This article is for general informational purposes only and does not constitute financial, accounting, legal, or SMSF advice. It does not consider your personal financial situation or objectives. Please consult a licensed professional before acting on any information regarding SMSFs, compliance, or investments. #SMSFProperty #ResidentialSMSF #SuperannuationRules #SMSFCompliance