Investing in property using a Self-Managed Superannuation Fund (SMSF) is a popular strategy for building retirement wealth. It offers investors control over their retirement savings, allowing them to choose specific properties that align with their financial goals. However, like any investment, there comes a time when exiting the investment is necessary.
An exit strategy is a plan for withdrawing from an investment, with the goal that the investor maximises returns and minimises risks. In the context of SMSF property investments, several exit strategies are available, each with its own set of considerations.
Holding the Property Until Retirement
The entire SMSF setup’s most opted exit strategy is holding the property until the SMSF members reach retirement age. At this point, the property can be transferred to the members as part of their pension benefits, or it can continue to generate rental income to support the fund’s pension obligations.
The key to this strategy is maintaining the property to make sure that it retains its value and rental income potential. Then, as the SMSF members approach retirement, the trustees can plan how the property will fit into the broader retirement strategy. Once in the pension phase, the SMSF can continue to hold the property, providing a steady stream of rental income to support pension payments. This is because rental income can be a valuable source of funds for supporting pension payments, and the property may continue to appreciate in value, increasing the overall wealth of the SMSF. This strategy is most appropriate for SMSFs that have invested in property for its long-term appreciation potential.
However, you should keep in mind that holding onto the property involves significant risks —the SMSF may lack liquidity, especially if unexpected expenses arise, or the property’s value may fluctuate, impacting the SMSF’s net asset value.
Transferring the Property to Members
Transferring the property directly to SMSF trustees is another exit strategy upon retirement. This option allows members to own the property personally, giving them complete control over its future use. The process of transferring the property involves several steps and can be summarized in the following way:
| 1. Property Valuation | A professional valuation is conducted to determine the property’s current market value. |
| 2. Decision on Transfer Method | The property is transferred to the members either as part of their pension benefits or as a lump sum payment. |
| 3. Regulatory Compliance | Ensure that the transfer complies with SMSF regulations and that all documentation is properly prepared and filed. This includes adhering to the rules set out in the Superannuation Industry (Supervision) Act 1994 (SIS Act) and the fund’s trust deed. |
| 4. Capital Gains Tax (CGT) Review | Review potential capital gains tax implications. If the property has been held for more than 12 months, the SMSF may be eligible for CGT discounts. |
| 5. Documentation and Finalization | Complete all necessary documentation to finalize the property transfer in compliance with the regulatory and tax requirements. |
Selling the Property and Repaying the SMSF Loans
One of the most straightforward exit strategies is selling the property and using the proceeds to repay any outstanding loan. This approach is preferable when the property has appreciated in value because it allows the fund to realize a profit. This can be identified with a thorough market evaluation aimed at understanding whether it is a buyer’s or seller’s market. Selling in a down market can result in lower-than-expected returns, and transaction costs, such as agent fees and legal expenses, can reduce the net proceeds.
Once you have decided to sell, the next step is to repay the loan. The loan must typically be settled immediately after the property is sold, with the remaining funds returned to the SMSF. At this point, it is also crucial to consider the tax implications of selling the property, as capital gains tax (CGT) may apply. However, if the property has been held within the SMSF for over 12 months, the fund may be eligible for CGT discounts, so make sure to consider that during the process.
The primary advantage of this exit strategy is liquidity. Selling the property provides immediate funds that can be reinvested in other assets or used to fund retirement benefits. Additionally, repaying the loan reduces the SMSF’s debt obligations, improving the fund’s overall financial health.
Value-Adding Renovations
Renovating a property can be a smart strategy for trustees of a Self-Managed Super Fund (SMSF) who are looking for an effective exit plan. It works both ways: holding the property long-term or selling it.
By improving the property, the trustees can increase its market value, which may lead to a higher selling price or greater rental income. This is because they are able to enhance the property’s appeal. Simple changes, like repainting walls, upgrading fixtures, or improving landscaping, can make a big difference in how the property is perceived. Elaborate renovations, such as updating the kitchen or adding extra rooms, can significantly boost the property’s functionality and overall value. So, if the trustees decide to sell, this upgrade can make the property more attractive to potential buyers. A higher market value means they can sell the property at a better price, maximizing the return on their investment.
On the other hand, even if the trustees do not plan to sell immediately, improvements can still be beneficial. By increasing the property’s rental appeal, they can charge higher rent, resulting in better cash flow for the SMSF.
Refinancing Self Managed Super Loans
Refinancing the loan is another useful exit strategy for SMSFs that are not ready to sell the property but need to adjust their financial position. Refinancing involves replacing the existing loan with a new one, often with favourable terms such as extended repayment periods or lower interest rates. This is a good approach if interest rates have recently dropped or the SMSF’s financial situation has improved since the original loan was taken out. The advantages of refinancing include improved cash flow and potential interest savings. By securing a lower interest rate, you are able to reduce monthly loan payments, freeing up funds for other investments or expenses.
However, refinancing is not without costs. The process often involves application fees, valuation fees, and legal expenses. Moreover, extending the loan term may increase the total interest paid over time, even if the monthly payments are lower. The entire process is quite extensive, which makes it necessary to consult a mortgage broker to guide you throughout.
Utilising a Buy and Lease-Back Arrangement
A less common but potentially advantageous exit strategy is a buy-and-lease-back arrangement. In this scenario, the SMSF sells the property to a third party and then leases it back, allowing the SMSF to continue using the property while unlocking its equity. This is useful for SMSFs that need immediate access to capital but still want to retain control over the property.
Passing the Property to Beneficiaries
In some cases, the exit strategy may involve passing the property to beneficiaries upon the death of an SMSF member. This is also relevant for SMSFs that hold property as a long-term asset and whose members wish to leave a legacy for their heirs. The process of passing the property to beneficiaries begins with careful estate planning. You should include the property in the members’ estate planning, ensuring that it is passed on according to their wishes. The transfer of property to beneficiaries must comply with SMSF regulations as well as estate laws, and it is important to consider the tax implications of the transfer.
Conclusion
These are some of the most commonly used exit strategies for SMSF trustees. Choosing the right exit strategy for your SMSF property investment ultimately depends on the particular goals you set for your superannuation fund. Whether you decide to sell the property and repay the loan, refinance it, hold it until retirement, transfer it to members, utilize a buy-and-lease-back arrangement, or pass it on to beneficiaries, you will need a cost-benefit analysis. This process is best simplified with the help of SMSF specialists at Ausfirst Lending Group, who help you make choices that best suit your retirement ambitions.
