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Investing in property through a Self-Managed Super Fund (SMSF) offers several advantages but comes with specific compliance requirements. If you’re considering this investment avenue, here is a concise guide based on expert advice from the Australian Taxation Office (ATO) and other financial insights.

Understanding SMSF and Property Investment

A SMSF allows you to use superannuation funds to invest directly in property, under strict conditions. These conditions are primarily in place to ensure the fund’s investments meet the sole purpose test of providing retirement benefits to its members.

Property Investment Rules: When buying property through an SMSF, the property must not be acquired from a related party of any fund members, and it cannot be used as a residence or rented to a fund member or related parties. This ensures the investment remains strictly for retirement benefits.

Tax Advantages: Investing through an SMSF can be tax efficient. Rental income received by the SMSF is taxed at a concessional rate of 15%, and if the property is sold after being held for more than 12 months, a one-third discount on capital gains tax applies, effectively reducing this rate to 10%.

Borrowing to Invest: SMSFs can also borrow to purchase property using Limited Recourse Borrowing Arrangements (LRBAs). This means the fund can take a loan to purchase a property, but the lender’s recourse is limited to the property itself, not other assets within the fund. This setup protects the rest of the super fund’s assets from potential recovery actions.

Retirement Phase Benefits: Once the fund members start receiving a pension, the SMSF might not have to pay any tax on rental income or capital gains from the property, making it a lucrative option for growing retirement savings.

Considerations and Risks

While the benefits are significant, the costs and risks associated with SMSF property investment are not trivial. There are setup and ongoing fees, legal complexities, and strict regulatory requirements. Non-compliance can result in severe penalties, including disqualification of trustees.

Potential investors should also note that the property must strictly be for investment purposes, meaning personal use in any form is prohibited. This compliance ensures the integrity of the superannuation system and its purpose in providing retirement benefits.

Given the complexities and stringent rules governing SMSFs and property investments, seeking professional financial advice is crucial. This will ensure your investment strategy is sound, compliant with superannuation laws, and aligns with your retirement goals.

For those intrigued by this investment strategy:

Comprehensive Research: Utilise authoritative resources such as the ATO and Moneysmart websites for in-depth information.

Professional Consultation: Engage with financial advisors specialising in SMSF and property investment to tailor a strategy to your circumstances.

Financial Analysis: Conduct a thorough assessment to ensure alignment with your long-term retirement objectives. Conduct a thorough assessment to ensure alignment with your long-term retirement objectives.

Investing in property through an SMSF can be a transformative strategy for your retirement planning. However, it requires careful consideration, expert guidance, and a clear understanding of the responsibilities.

Read More: Understanding Section 32: What Sellers Need To Know

We invite you to explore how this approach might enhance your financial future. For detailed insights and guidance on setting up an SMSF for property investment, our team is ready to provide valuable information, ensuring you make informed decisions at every step.

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As a property investor, tax time can be a crucial period to maximise your returns and minimise your liabilities. With the right strategies and knowledge, you can navigate the complex world of property investment taxation and come out ahead. In this blog post, we’ll share some top tips to help you make the most of tax time as a property investor.

Property Investors At Tax Time

When it comes to purchasing property, the complexity of the process cannot be overstated. From initial budget considerations to final settlement, every step involves significant detail and potential for oversight. A property buying checklist serves as a critical tool that guides buyers through the intricate journey, ensuring nothing is overlooked. It details necessary actions like financial preparations, property inspections, legal checks, and more. By systematically ticking off each item, buyers can proceed with confidence, knowing they are informed and prepared at each stage.

  1. Maximise deductible expenses You can maximise your tax deductions by claiming a range of expenses associated with managing and maintaining your investment property. These tax-deductible costs include advertising for renters, body corporate fees, council rates, insurance, interest on loans, property management fees, repairs and maintenance, and utility charges not paid by your renters. To ensure you can claim all the deductions you’re entitled to, it’s crucial to keep meticulous and organised records of all income and expenses related to your property, including rental income, mortgage payments, depreciation schedules, and the above expenses. Doing so will simplify the process of preparing your tax return and help you maximise your overall returns.
  2. Claim depreciation deductions Depreciation is an often overlooked but valuable deduction for property investors. It allows you to claim the decline in value of your investment property and its fixtures and fittings over time. There are two types of depreciation: capital works deductions for the building itself, and plant and equipment deductions for items like carpets, appliances, and air conditioning units. To maximise your depreciation deductions, consider consulting with a quantity surveyor to get a depreciation schedule. This schedule will detail the deductions available over the life of your property, potentially saving you thousands of dollars every tax season.
  3. Apportion expenses for mixed-use properties If your investment property serves dual purposes—both rental income and personal use—you need to split your expenses accordingly. For instance, if you rent out your holiday home for half the year and use it personally for the remaining months, you are only eligible to claim deductions for expenses incurred during the time it was rented. This includes claiming interest on loans used for buying, building, or renovatingfor the periods your property was rented or genuinely available for rent. Maintaining detailed records of rental versus personal use periods is crucial for accurate tax filing.
  4. Look into land tax implications Land tax is an annual tax applicable to all property owners in Victoria, except for your primary home, known as your principal place of residence. The State Government of Victoria outlines that land tax is based on the combined value of all taxable property you own. Being aware of how much land tax you might need to pay can influence your investment decisions, especially if you plan on expanding your property portfolio.
  5. Prepay some expenses Prepaying certain expenses can be a smart strategy for you to bring forward deductions and reduce your taxable income for the current financial year. Some expenses you may consider prepaying include insurance premiums, council rates, and strata fees. Keep in mind that prepaid expenses are only deductible in the year they are paid, so this strategy may not be suitable for everyone.
  6. Understand capital gains tax When selling your investment property, you will likely incur Capital Gains Tax (CGT) on any profit made. To minimise your CGT liability, consider strategies such as holding the property for more than 12 months to potentially qualify for a 50% discount or using a self-managed super fund (SMSF) for your property investments. Consulting with a tax professional is crucial for you to understand your CGT obligations and strategically plan the sale timing, as these decisions can significantly impact the CGT payable.
  7. Negative gearing Negative gearing is a common practice amongst property investors, where the costs of owning your property exceed the income it produces. You can deduct this loss from your other income, reducing your overall tax liability. This strategy is particularly appealing during periods of high rental vacancy rates or when your property requires extensive repairs.
  8. Seek professional advice Property investment taxation can be complex and confusing, especially with frequent changes to legislation. To ensure you’re making the most of your deductions and minimising your liabilities, it’s wise to seek advice from a qualified tax professional who specialises in property investment. They can help you navigate the tax system, maximise your returns, and avoid costly mistakes.

Tax time can be a valuable opportunity for you as a property investor to boost your returns and minimise your tax liabilities. By using the points above as a guide, you can make the most of your investment properties. Your situation as a property investor is unique, so it’s important to consult with a qualified tax professional to develop a personalised strategy that works for you.

Summary

At LP Advisory, we can point you in the right direction when it comes to your investment property and tax time. Our deep understanding of the local property market helps you navigate the complexities of property investment taxation with confidence.

Whether you’re a seasoned investor or just starting out, we can provide personalised advice and guidance to help you maximise your returns, minimise your liabilities, and achieve your long-term financial goals. Contact us today to schedule a consultation and take the first step towards a more profitable and stress-free tax time.

Read More: Understanding Section 32: What Sellers Need To Know

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As Melbourne’s property market continues its strong post-COVID performance, investors are keeping a keen eye on the inner east and bayside suburbs. These established, affluent neighbourhoods offer a compelling mix of lifestyle amenities, strong infrastructure, and an appealing range of housing stock – an ideal combination to drive capital growth and rental yields, making these areas lucrative hotspots for savvy investors to consider in 2024. Let’s explore some of the standout suburbs currently presenting attractive investment opportunities:

Elsternwick
(City of Glen Eira)

Median House Price*: $1.95 million

Elsternwick has quickly become one of Melbourne’s most in-demand inner city suburbs. This dynamic village offers a vibrant lifestyle with its thriving Glenhuntly Road shopping precinct, the sprawling Elsternwick Park, and highly regarded schools like Wesley College nearby. While located just 9km from the CBD, it provides an affordable alternative to similar suburbs closer to the city centre. But with limited new housing supply, high demand from keen buyers keeps pushing up real estate prices and driving competition in this highly coveted neighbourhood.

Caulfield
(City of Glen Eira)

Median House Price: $2.19 million

Long regarded as one of Melbourne’s most desirable postcodes, Caulfield’s property market shows no signs of slowing down. The suburb benefits from a diverse array of shopping and dining precincts, abundant recreational facilities like parks and sports clubs, elite educational institutions, and multiple public transport options including trains, trams, and buses. Its central, convenient location around 10km southeast of the CBD is a major selling point, and with its well-established reputation and local amenities, Caulfield remains a sought-after address, propelling resilient property values.

Surrey Hills
(City of Boroondara)

Median House Price: $2.68 million

Embodying the prestige of Melbourne’s desirable inner east, Surrey Hills has rapidly emerged as a prime address for families and professionals. This suburb has proven highly popular in recent years, drawing buyers with its picture-perfect streetscapes, abundant quality housing stock, and proximity to lifestyle hubs like the charming Maling Road Village and vibrant Camberwell Junction. Strong buyer demand shows no signs of waning, driven by the area’s easy access to esteemed private schools, verdant parks and recreation areas, coupled with a short commute to the CBD. Surrey Hills ticks every box for those seeking a prestigious yet family-friendly environment in a tightly held pocket.

Sandringham
(City of Bayside)

Median House Price: $2.14 million

One of Melbourne’s most desirable bayside suburbs, Sandringham combines an enviable beachside location with a dynamic village atmosphere and exceptional amenities. Shopping strips like Melrose Street and Bay Road offer an array of boutiques, cafes, and restaurants, while the area also features recreational drawcards like the Sandringham Golf Course and numerous beach parks. Sandringham’s housing market has remained robust even through recent property cycles, upheld by persistently strong buyer demand from families and professionals seeking a beachside lifestyle. Limited development opportunities due to geographical constraints mean existing properties in the tightly-held suburb carry an extremely high scarcity value, driving up prices.

Brighton
(City of Bayside)

Median House Price: $3.25 million

An iconic bayside suburb, Brighton’s median house price reflects its prestigious blue-chip status. Home to some of Melbourne’s most desirable real estate, the area offers residents a coveted beachside lifestyle coupled with easy access to the CBD and a wealth of amenities. Shopping villages like Church Street and Bay Street provide upscale retail and dining experiences, while elite schools such as Brighton Grammar and recreational facilities such as the renowned Brighton Beach and iconic Brighton Baths cater to residents’ every need. Low housing stock due to the suburb’s exclusive locales ensure resale values for existing homes remain sky-high amidst intense demand.

Beaumaris
(City of Bayside)

Median House Price: $1.95 million

Situated around 20km southeast of the CBD, this bayside locale offers relative value compared to other prestigious neighbouring suburbs like Brighton and Sandringham. Beaumaris is renowned for its quality housing stock, direct access to beaches like Ricketts Point, and abundant open green spaces such as Donald MacDonald Reserve and Cheltenham Park. Family-friendly amenities including highly regarded schools, sporting clubs, and the lively Beaumaris Concourse shopping village make it an attractive option. Despite its slightly lower entry price point, the area is still tightly held with strong ongoing demand from buyers seeking that quintessential bayside lifestyle at a more affordable price point relative to surrounding blue-chip locales.

Hampton
(City of Bayside)

Median House Price: $1.97 million

Another coveted bayside suburb, Hampton delivers an idyllic beachside lifestyle around 14km from the CBD. Its vibrant Hampton Street retail village strip offers a range of boutiques, cafes, and restaurants, while recreational offerings like the prestigious Royal Melbourne Golf Club and numerous beach parks provide ample leisure activities. Hampton’s quality housing stock across its leafy streets is a major lure for families and investors alike. Buyer demand sustained by the suburb’s enviable amenities and lifestyle have helped drive solid capital growth in property values over the long term. Hampton encapsulates the dream of luxury bayside living within easy reach of Melbourne.

McKinnon
(City of Glen Eira)

Median House Price: $1.77 million

This underrated suburb offers excellent value for its inner urban location around 12km southeast of the CBD. McKinnon provides easy access to renowned educational facilities like McKinnon Secondary College and Monash University (Caulfield campus), popular shopping precincts including McKinnon Village, Ormond, and Bentleigh, and expansive open spaces such as Wattle Park and Duncan Mackinnon Reserve. The area’s family-friendly credentials are further enhanced by a range of sporting clubs and community amenities. With its relatively affordable entry price point compared to neighbouring suburbs coupled with high liveability factors, McKinnon is driving consistently strong buyer demand as an appealing option for those seeking inner city convenience without the exorbitant price tags.

Ormond
(City of Glen Eira)

Median House Price: $1.93 million

Bordering McKinnon, Ormond exhibits similar investment credentials including its well-priced housing relative to surrounding areas. The suburb’s village atmosphere is exemplified by its amenities like the popular North Road retail strip with its cafes and shops, the weekly Piccadilly Market, and the tranquil E.E Gunn Reserve. Easy CBD access via Ormond Station on the Frankston line is another major plus, while respected schools such as Kilvington Grammar School and St Kevin’s Primary School add to the suburb’s family-friendly appeal. The combination of lifestyle amenities, relative affordability and convenience factors continue to support strong buyer demand in Ormond, making it an attractive option for investors and home buyers alike.

What Makes a Smart Investment Suburb?

While median prices offer a useful snapshot, savvy investors understand that a combination of factors drive long-term capital growth. They focus on areas exhibiting a compelling mix of amenities, desirable housing stock, geographical or policy-based development constraints, and local economic fundamentals and infrastructure. The above suburbs tick many of those boxes, offering lifestyle appeal, quality properties, and economic resilience that support their long-term investment prospects.

However, every investor’s circumstances and goals are unique. Conducting thorough due diligence tailored to individual objectives is always advisable. This is where engaging the services of a professional buyers advocate like LP Advisory can make all the difference. With our deep market knowledge, extensive networks, and proven negotiation skills, we can provide strategic guidance to help clients navigate the complex property market and achieve their wealth-building aspirations through astute property acquisition. Whether it’s identifying lucrative opportunities, avoiding costly pitfalls, or securing properties at the best possible price, LP Advisory can offer expert advice and support to optimise your investment outcomes.

*Median house prices as of early 2024 based on data from reiv.com.au