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Dear Sir/ Madam
Few of the friends decided to purchase a residential property through their SMSF. Can two or more SMSFs purchase a residential property through limited recourse borrowing under the title tenants in common?
I know they can create an Unit trust and purchase a residential property without borrowing (non-geared). However, they do not have enough fund and they want to purchase a residential property in partnership.
Do you have other solutions on how they can manage the above situation?
Thanking you in advance.
Kind regards,
Dipak Mehta
Hello Dipak
Thank you for your question.
Where an SMSF is to own an interest in real estate (in the scenario at hand, a 50% interest in residential property), it is possible to use a Limited Recourse Borrowing Arrangement (LRBA) to fund the acquisition.
Similarly, where there are two SMSF investors, each having a 50% interest as tenants in common, it is possible for each SMSF to partially fund their interest through a sperate LRBA.
Each SMSF would need its own bare trust arrangment in place in repsect of its interest in the property.
Please be mindful of the need to ensure that should for example, SMSF A default on its loan, that the interest of SMSF B in the property, cannot be available to meet SMSF A’s obligations to its lender.
Given the property in question is a residential property that is assumed not to be business real property, the SMSFs that have an interest in it, will not be able to lease it a member of the SMSF or to a relative of a member of the SMSF.