Buying property in the US?

ARE we allowed to borrow with our SMSF to get a property in the US? We have about $60,000 available to use for a US property but need another $20,000 to get into the sort of property we want. We have US lenders who will loan to us and we have set up a limited liability company (LLC) on our last trip over there. Thanks for your help.

Answer this week provided by Liam Shorte, a financial planner and SMSF specialist at NextGen Wealth Solutions.

We are hearing more and more about this strategy of using your SMSF to purchase property in the US. There are no restrictions on what country you can invest in from an SMSF point of view.

My concerns are that you are dealing with different tax, legal, insurance, currency exchange rate risk and liability issues than you would investing here in Australia. You mention that you have an LLC set up, which is fine, but you say you have US lenders who will loan to you. Does that mean they will loan to the LLC, to your SMSF (unlikely as they would not recognise the legal structure) or to you personally?

Would you be required to provide personal or SMSF guarantees that would breach the SIS rules [Superannuation Industry (Supervision) Regulations 1994] here in Australia? Would they be prepared to lend to one entity but have the security owned by a bare trust as required by Australian superannuation law? You would need comprehensive legal advice before signing any US documentation on behalf of the SMSF as you have a fiduciary duty to act in the best interests of your fund.

You cannot borrow in the USA without providing your social security number, even through a corporate entity, and the paperwork is so complicated that you would be well advised to use accountants and lawyers to handle it, which won’t come cheap. As with all investments, beware of property companies that offer related party services to handle the paperwork for you. They are interested in the sale to you, not in the long term legality of the work.

If you use a bare trust and trustee to hold the property while the borrowing is in place when you transfer the US real property to the fund at the end of the loan then you may be subject to US gift tax. Again, this is the case even where a gift tax treaty applies. There is no gift tax credit available to a transferor who is neither a citizen of nor resident in the US. The fair market value of the property at the date of the gift/transfer is subject to tax. I won’t go in to capital gains tax here as it would take up too much space, but I would recommend you seek advice on this matter.

The Aussie dollar is very high at the moment, which works in our favour, but historically it has been valued at between 70-80c to the US dollar. If it should return to that average over the long term then you are looking at a 10-20% loss totally unrelated to the property you have invested in.

However if you wish to proceed then here are a few of the items to consider and the first two are oft-repeated guidelines that must be followed:

• Check that your SMSF trust deed does allow you to do the investment. Do not assume anything.
  
• Check your SMSF investment strategy allows or is amended to include overseas property investment and then confirm the various risks involved are clearly addressed by the trustees before deciding to proceed.
  
• The next steps involved include identifying a property in the US and I would recommend that you visit the property itself and do your own research as even places people visited two or three years ago are wastelands now! If you are buying from an Australian company selling US real estate then you will most likely lose a lot of your capital as commissions of 10-30% are commonplace on such deals and that is a lot of capital growth required in a depressed market.
  
• As you have done, investors will need to set up a US-based LLC and open up a bank account. At this stage taking on the services of an experienced accountant and property lawyer in both jurisdictions would be advisable. You then transfer funds from Australia to the US bank account of the LLC to fund your purchase.
  

An LLC is by default treated as a flow-through vehicle for tax purposes. Some US states have taxes that are levied on a state level to the LLC. Any taxes paid in the US can be claimed back as a credit in Australia due to the double tax agreement between the US and Australia.

If you need to borrow then you need to ensure that any arrangements you enter into on behalf of the SMSF are compliant with the Australian superannuation laws and regulations.

• Your property manager will receive rental income and deduct their maintenance costs and management fee before depositing the net rental income into your US bank account. Fees of 10% and much higher maintenance costs are common in the US property sector.
  
• Insurance is essential and you don’t want to be left uninsured or underinsured in the US where litigation and liability are words followed by figures with six zeros!
  

In summary, US property investing can be challenging, so add in a separate entity like an SMSF and include some specialist borrowing requirements, and you are getting way beyond most people’s and even local tax and legal practitioners’ level of expertise. The costs of arranging the structure and maintaining it could be enormous and often compulsory.

This is general advice so please seek specific financial, tax and legal advice on your own personal circumstances and those of your SMSF before making any investment in property outside of Australia.

For more from Liam Shorte, financial planner and SMSF specialist advisor visit www.nextgenwealth.com.au and www.smsfcoaching.com.au or follow him on Twitter @smsfcoach