Buying residential property in your SMSF without borrowing
A cash purchase of residential property by your SMSF is fully permitted under current law and remains permitted under the legislated changes. The restrictions being discussed apply specifically to Limited Recourse Borrowing Arrangements (LRBAs) — loans taken out by the SMSF to purchase property — not to cash transactions.
How it works
Your SMSF accumulates contributions and investment returns over time. Once the fund has sufficient cash, it can purchase:
- Residential investment properties (houses, apartments, townhouses)
- Commercial properties
- Rural properties
- Specialised property (subject to ATO guidance)
The advantages of a cash purchase
- No interest expense — the entire rental income is available to build fund value
- No LRBA compliance requirements — simpler administration
- No risk of the legislated borrowing ban affecting the strategy
- No refinancing concerns that might affect grandfathered status
The limitations
- Requires significant fund balance — residential properties in most Australian cities cost $500,000 or more, meaning the fund needs substantial accumulated assets
- Concentration risk — a single property can represent a large proportion of the fund's total assets
- Liquidity risk — property is illiquid; the fund must maintain enough liquid assets to pay member expenses and income streams
Depreciation in your SMSF
The SMSF can claim tax depreciation on the residential property, including Division 43 capital works and Division 40 plant and equipment. This reduces the fund's taxable income at the 15% accumulation phase rate. A quantity surveyor depreciation schedule should be prepared.
When a cash purchase makes sense
A cash purchase is a sensible SMSF property strategy when:
- The fund is mature and well-capitalised
- The property is in a solid rental market with reliable yield
- The fund can maintain adequate cash reserves after the purchase
- The investment aligns with the fund's overall investment strategy