Renovating your smsf property is possible in certain circumstances. Owning a property in an SMSF allows the Fund to grow your asset base for retirement using the property as a class of assets.
In certain limited circumstances, a renovation can take place. However, the SMSF laws don’t allow the Fund to use borrowed monies to fund renovations of the property
Does your SMSF property have borrowings attached to it?
Renovating your SMSF property will depend entirely if the SMSF has borrowings against the property. The current SMSF laws prohibit renovations using borrowed money by the Fund.
If the Fund holds the property outright and is unencumbered, it can use its existing SMSF capital to improve it. Tracing the flow of funds to be used by the SMSF in the renovation is essential. This explains to the ATO by proving that no borrowed funds are used in funding the renovations.
Repair or improvement
Before embarking on any upgrade or repair, check the nature of the expense to see if your fund can undertake it!
A repair is undertaken to rectify the property without changing the character and merely replaces a defunct item. Whereas an improvement, changes the character of the property and improves the value. Painting a property is clearly a repair, whereas a new deck would be an improvement to the SMSF property.
Be careful as a member undertaking the renovations within the Fund. Any materials used in the renovation needs to be purchased outright by the Fund from a 3rd party, not from yourself
Using the Fund’s cash on a reno if the rules allow should be documented as part of the Funds Investment strategy.