Property has long been the reason many people start an SMSF. The rules changed significantly in 2026: from 10 August 2026, an SMSF can no longer borrow to buy residential investment property. Buying property in an SMSF is still possible, but the strategy now depends on what kind of property it is and whether the fund can pay cash. This guide explains the current rules for SMSF property investment and what the change means for funds that already have a loan.
What changed in 2026
Schedule 5 of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 amended the superannuation borrowing rules. From 10 August 2026, an SMSF can use a limited recourse borrowing arrangement (LRBA) to acquire real property only if the property is business real property: broadly, land and buildings used wholly and exclusively in one or more businesses. Zoning, the type of loan or the fact that a property earns rent does not by itself make it business real property.
- Existing LRBAs entered into before 10 August 2026 are grandfathered. The property does not need to become business real property
- Refinancing a pre-10 August LRBA is not affected, although a refinance that adds new borrowing or changes the arrangement materially needs advice first
- Binding contracts exchanged before 10 August 2026 can still proceed with an LRBA even if settlement happened afterwards
- Buying residential property with cash is still allowed, subject to the usual rules below
Rules that apply to all SMSF property
- Sole purpose test: the property must be held only to provide retirement benefits for members. Members and their relatives cannot live in it, holiday in it or rent it, even at market rent, if it is residential
- No residential property from related parties: the fund cannot buy a residential property from a member or related party
- Business real property is different: the fund can buy business real property from a member or related party at market value, and lease it to a related business at market rent under a written lease. This is the classic structure of a business owner’s SMSF owning the business premises
- Investment strategy: a single property can be a large share of the fund. The strategy must address diversification and liquidity, including how the fund will pay pensions, expenses and any loan repayments
- Arm’s length dealings: rent, purchase price and any related party loan terms must be on commercial terms. Non-arm’s length income is taxed at 45%
How an LRBA works for business real property
Where borrowing is still permitted, the property is held in a separate holding (bare) trust until the loan is repaid, and the lender’s recourse is limited to that property. The loan can fund the purchase and repairs or maintenance, but not improvements that change the asset’s character, such as building a second dwelling. If a member or related party lends to the fund, the terms must meet the ATO’s safe harbour terms or otherwise be shown to be arm’s length, or the income becomes non-arm’s length income.
Paying for property: cash and timing
Without borrowing, the fund must have enough money to pay the full price, stamp duty and costs, and still keep a cash buffer. Members can build that balance through contributions within the caps, rollovers from other funds, and in some cases by combining balances of several members. See the 2026-27 contribution caps.
Tax on SMSF property
- Rent is taxed at 15% in accumulation phase and can be exempt to the extent the fund supports retirement phase pensions
- Capital gains on property held more than 12 months receive a one-third discount in accumulation phase
- Expenses such as interest, rates, insurance and depreciation are deductible to the fund
- A property must be valued at market value each year for the financial statements, which the auditor will check
Frequently asked questions
Can my SMSF still buy a house or apartment?
Yes, with cash, and only as an investment rented to unrelated tenants at market rent. It cannot borrow to do so after 10 August 2026.
Can my SMSF buy my business premises?
Yes, if it is business real property, bought at market value and leased to the business on commercial terms. Borrowing to do so is still permitted.
We have an existing residential LRBA. Do we have to sell?
No. Arrangements entered into before 10 August 2026 are grandfathered and can be refinanced.
SMSF property advice in Melbourne’s west
Kennedy Tax & Business Services prepares SMSF accounts, valuation records and annual returns for property-owning funds, and we audit SMSFs administered elsewhere. See our SMSF accounting, SMSF audit and SMSF set-up guide, or contact us.
This article is general information only and does not take into account your circumstances. It is not financial product advice. Whether a property is business real property depends on its actual use. Speak to a registered tax agent and a licensed financial adviser before acting.
