When buying property using an SMSF loan, the repayments are typically made from the SMSF itself.
Funds from the SMSF: The SMSF uses its available cash—such as member contributions, rollovers, or other investment income—to make loan repayments. These contributions are often made up of both employer contributions and personal contributions that are tax-deductible, so there is always a steady flow of funds into the SMSF.
Rental Income: If the property purchased is an investment property that generates rental income, this income is paid directly into the SMSF and can be used to cover the loan repayments. This setup is particularly advantageous because it aligns the investment's income stream with its expenses.
Tax Considerations: The interest component of the loan repayments is typically tax-deductible to the SMSF, which can help to reduce the fund’s overall tax liability.
Liquidity Planning: It’s important for the SMSF to maintain sufficient liquidity to ensure it can meet the loan repayments, especially when there might be fluctuations in rental income or unexpected expenses associated with the property. This might involve maintaining a cash buffer within the fund.
Loan Structure: SMSF property loans are set up as Limited Recourse Borrowing Arrangements (LRBAs). This means if the SMSF defaults on the loan, the lender’s recourse is limited to the property purchased with the loan, and they cannot access other assets within the fund.