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Self-managed super funds are a great option for real estate investment, but be careful.

Self-managed super funds are a great option for real estate investment, but be careful

Figures from the Australian Taxation Office show property investment in self-managed super funds is growing fast.

''There is now a significant trend towards direct property investment in SMSFs because a lot of baby boomers are wanting to take control of their super,'' says Michael Yardney, director of Metropole Property Strategists. ''They've lost confidence in the managed-funds industry and the volatility of the sharemarket is fresh in their minds so they want to invest in the security of bricks and mortar.''

Significant tax breaks are the biggest drawcard for SMSF investors. Rental income and capital gains are taxed at 15 per cent and if you hold the property in your SMSF until your super goes into the pension phase, you pay no tax on the rental income or on the capital gains if you sell.

Self-managed super funds are a great option for real estate investment, but be careful

On the downside, you can't live in the property and neither can any friends or family members. If the property is negatively geared, the tax offset only applies to income earned within the fund, not to your regular income. Borrowed funds cannot be used for major improvements or to substantially change the property. And there are costs involved in setting up and running an SMSF and setting up the bare trust required to purchase property.

It's also worth noting that under present legislation you can't refinance a property in an SMSF in order to gain access to equity and buy another property. For this reason, younger investors looking to build their asset base would be better placed outside the SMSF environment.

''While I can see the attraction of buying new, I don't like buying new because you pay a premium,'' Yardney says. ''Instead, look for something which is neat and tidy and is not going to need a lot of work in maintenance and repairs.''

Story by Kate Farrelly  Story source: www.domain.com.au

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