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What are the risks involved in borrowing within an SMSF for property investment?

Borrowing within an SMSF for property investment, known as a Limited Recourse Borrowing Arrangement (LRBA), comes with several risks, including:

• Higher Costs: SMSF property loans can be more expensive than other property loans.
• Cash Flow: Ensuring your fund has enough liquidity to cover expenses, including loan repayments and property-related costs.
• Loan Balance: Planning for loan repayment in the event of member illness, disability, death, or rental vacancy.
• Unwinding Challenges: Difficulty in reversing the arrangement if loan documents aren’t correctly structured, potentially resulting in substantial losses.
• Tax Limitations: You cannot offset tax losses from the property against your taxable income outside the fund.
• Alteration Restrictions: Significant property alterations are restricted until the SMSF property loan is fully repaid.