If you’ve set up a Self-Managed Superannuation Fund (SMSF), you would have investments in the form of property. Be it a commercial building you’re leasing out or a residential investment you’ve been holding for a while. Either way, at some point, you’re going to need an exit strategy for this investment. And the goal is always to optimise your retirement outcomes!
Why Do You Need an Exit Strategy?
We often think of investments in terms of buying, but selling or exiting an investment is just as important. This means that your exit strategy is what determines how (and when) you’ll cash in on your investment, minimise risks, and meet your retirement goals. With property investments inside an SMSF, you can’t just sell a property and walk away. The process is more complex, thanks to the regulations surrounding superannuation. Therefore, collaborating with specialists such as AxJ Finance Brokers can provide invaluable guidance in managing these challenges.
Hold the Property Until Retirement
The simplest strategy might be to hold onto the property until you hit retirement age. After all, if your property is doing well—providing stable rental income and appreciating in value—why not keep it as a basis of your retirement income? And once you reach retirement, your SMSF enters the “pension phase,” and any income or capital gains on assets in this phase are tax-free. This means that your rental income becomes even more valuable, and if you decide to sell the property later, you won’t be hit with capital gains tax (CGT).
But holding onto a property is not always in your favour. Properties can be illiquid—meaning that if your SMSF needs quick cash, selling a property isn’t as fast or simple as liquidating stocks or bonds. Plus, property values fluctuate, so what looks like a solid investment today might not be that secure in 10 years. Make sure your SMSF has a balance of assets that provides enough liquidity to handle unexpected expenses.
Transfer the Property to Members Upon Retirement
Another option is to transfer the property to the SMSF trustees (that’s you, most likely!) once they reach retirement. This means taking the property from the SMSF and holding it in your name. The reason is that you gain personal control over the property and can do what you want with it: live in it, rent it out, or sell it when it suits you. The SMSF law does not stop you!
This can be a good option if you have a personal use in mind for the property post-retirement or want more control over how and when it’s sold. But, of course, this doesn’t come without a process. Transferring the property requires a professional valuation to assess its current market value, and you’ll need to ensure everything complies with SMSF regulations (like the Superannuation Industry (Supervision) Act or the SIS Act). Plus, there might be tax implications, so you’ll need to keep an eye on CGT. But keep in mind, if the property is transferred in the pension phase, you may avoid CGT entirely.
Sell the Property and Repay the SMSF Loan
Sometimes, the simplest solution is the best: just sell the property. This will help you pay off any SMSF loans associated with the property. And if you worked well throughout, it will leave ves you with a nice chunk of cash to reinvest or use for pension payments. This also offers an advantage in liquidity because once the property is sold, you’ve got cash in hand. And this gives your SMSF flexibility. You could reinvest the funds in other, more liquid assets or simply keep the cash available for retirement needs.
Now, the key to success with this strategy is timing. Selling in a down market could mean lower returns than expected, so it’s important to evaluate the current property market before listing. If your property has appreciated significantly, this strategy could work out quite well. But don’t forget to factor in selling costs—agent fees, legal costs, and possible CGT if you’re selling before the pension phase. It’s best if you consult a mortgage broker at this point so you have a good understanding of everything before you make the decision to sell your property.
Refinance the SMSF Loan
Now, if you’re not ready to sell just yet but are also feeling the pinch of SMSF loan repayments, refinancing the loan is a good option! By refinancing, you might be able to lock in lower interest rates, extend the loan term, or adjust the repayment schedule to improve your cash flow. So, for example, if interest rates have dropped since you first took out your SMSF loan, you will be able to reduce your monthly payments, leaving more room in your SMSF budget for other investments.
However, be mindful of the costs of refinancing, like valuation, application, and legal fees. Plus, while you might lower your monthly payments, extending the term could mean you end up paying more in interest over the long haul. So, it’s important to weigh your options accurately.
As you consider your refinancing options, it’s also beneficial to explore other investment loan options that could further enhance your SMSF’s financial flexibility and growth potential.
Add Value with Renovations
This is one of those strategies that works in two ways—whether you want to hold the property or sell it. Renovating a property can increase its market value, which makes it more attractive to buyers if you’re planning to sell. Alternatively, it can boost rental income, which is great for SMSF cash flow if you’re holding onto the property for the long term. So, consider simple upgrades like fresh paint, new fixtures, or improved landscaping that can work wonders for a property’s appeal.
If you want to consider the long term, larger renovations like adding an extra room or modernising the kitchen can boost your rental income and make the property more attractive to potential buyers when it comes time to sell.
Just keep in mind if your SMSF holds the property under a Limited Recourse Borrowing Arrangement (LRBA), you can’t use borrowed funds to improve the property, only to maintain or repair it. Make sure any renovation plans align with SMSF law to avoid complications.
Consider a Buy-and-Lease-Back Arrangement
This strategy isn’t as common, but it can be a good approach if you need cash but want to keep using the property. In a buy-and-lease-back arrangement, the SMSF sells the property to a third party and then leases it back. This allows the SMSF to access the equity tied up in the property while still using it (perhaps for a business you own, if it’s a commercial property). Keep in mind, though, that this arrangement has to pass the sole purpose test, meaning it must primarily serve the purpose of providing retirement benefits to members.
Passing the Property to Beneficiaries
Lastly, if your goal is to leave the property as an inheritance, you can consider passing it on to beneficiaries, usually upon death. So you can include the property in your estate planning and ensue that your wishes are properly documented in the SMSF’s trust deed. And, you’ll also need to consider any tax implications, as there may be taxes owed when the property passes to beneficiaries.
Conclusion
As you can see, there are many options when it comes to exiting your SMSF property investment. If you are aiming for liquidity and flexibility, selling the property might be the best option. Whereas, if you want to keep it as a source of retirement income, holding onto it or transferring it to members could make more sense.
In any case, it’s essential to plan ahead and seek professional advice. SMSF specialists at AxJ Finance Brokers can help you weigh the costs and benefits of each option, ensuring you make the right choice for your retirement goals.