IT seems that everyone wants to worry about the growing practice of buying real estate in a self-managed superannuation fund. From the government to financial planners to the Reserve Bank, the warnings have been getting louder in saying that this is an area that can severely damage your life savings.
Some of the concern is justified, and is necessary to combat the rise of property spruikers who use slick sales tactics to coerce people to borrow heavily in super to buy overpriced real estate.
But property investment in superannuation should not be avoided just because of warnings about some dodgy players in the self-managed superannuation advice industry.
The tax breaks offered by our super system are huge for property investors, particularly the tax-free nature of super after aged 60.
If the same property is held outside super, $250,000 of the gain gets added to their taxable income – which would result in a tax bill of tens of thousands of dollars.
The same tax breaks are available for other investments such as shares and managed funds, but they can be sold in smaller parcels than property so the tax burden can be spread more evenly.
However, groovy tax benefits should never be the main reason for an investment. The numbers should stack up without the tax benefits, and if you would not buy an off-the-plan apartment in Queensland from a property spruiker outside of super, you certainly should not be considering it inside a super fund.
There are other risks, including:
???????????????? – Putting all your eggs in one basket: If you already own a home and an investment property, is it really a good idea to invest your super nest egg in the same class of asset? Shares have historically been just as good a long-term investment as property – just don’t mention the GFC, where they more than halved in value and are still not back to their 2007 highs.
???????????????? – Government tinkering is frustrating. The tax benefits of super were set to be severely watered down last year, but it didn’t go ahead. However, you can bet your nest egg that there will be more changes in the future.
???????????????? – Super is supposed to pay a retirement income, and if an investment property is unable to provide that to a retiree because tenants stop paying rent, their fund can be in breach of the rules and suffer big penalties.
If you can manage the risks, avoid marketing schemes and don’t borrow too much, property investment in super should not be ignored completely just because the voices against it have grown louder.