SMSF property and LRBA borrowing rules (2026 update)

Borrowing inside an SMSF to buy property is allowed, but only through a very specific structure called a limited recourse borrowing arrangement (LRBA) — and, since 10 August 2026, only for commercial property. Every part of the structure exists to satisfy the SIS Act's prohibition on most fund borrowing — get a step wrong and the whole arrangement can be unwound by the ATO.

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01The 2026 change: no new residential LRBAs

Under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, an SMSF cannot enter into a new limited recourse borrowing arrangement to acquire residential property on or after 10 August 2026. New LRBAs over real property are limited to business real property (commercial premises). Residential property can still be acquired by an SMSF outright, using the fund's own cash — the prohibition is on borrowing, not on ownership.

Existing arrangements are fully grandfathered. If your SMSF entered into a residential LRBA before 10 August 2026, the loan and the property continue on their existing terms; the fund can keep servicing the loan, hold the asset and sell it when it suits the strategy. easySMSF continues to administer, account for, and arrange the audit of grandfathered residential LRBAs as normal.

02The basic structure

Under section 67A of the SIS Act, an SMSF can borrow only if all of these conditions are met:

• The borrowed money is used to acquire a single acquirable asset
• For real property acquired on or after 10 August 2026, that asset is business real property
• The asset is held in a separate holding trust (often called a 'bare trust') with a custodian trustee
• The SMSF has a beneficial interest in the asset and the right to acquire legal title once the loan is repaid
• The lender's recourse on default is limited to the asset itself — other fund assets are protected

03Single acquirable asset

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An LRBA can fund only one asset, or a collection of identical assets with the same market value (e.g. a parcel of identical shares). For property this usually means one title — two adjoining titles generally need two separate LRBAs, even if you intend to develop them together. The ATO has detailed guidance in SMSFR 2012/1.

04What you can and can't do to the property

Borrowed money can be used to maintain or repair the property (returning it to its original state), but cannot be used to improve it (changing its character — e.g. adding a new bedroom or building a granny flat). Improvements can be made using the fund's own cash, but the asset's character can't change so significantly that it becomes a 'different' asset while the LRBA is on foot.

05Related-party loans and PCG 2016/5

If your SMSF borrows from a related party (a member, relative, or family company) instead of a bank, the loan must be on arm's-length terms or the income from the asset becomes non-arm's-length income (NALI), taxed at 45%. The ATO publishes safe-harbour terms in PCG 2016/5 covering interest rate, loan-to-value ratio, term, and repayment frequency for both real property and listed shares. If you don't meet the safe harbour, you must demonstrate the terms are still genuinely arm's-length.

06What auditors check on an SMSF LRBA

• A signed bare trust deed dated before settlement
• For arrangements entered into on or after 10 August 2026, evidence the property is business real property
• For residential arrangements, evidence the LRBA was entered into before 10 August 2026 (grandfathering)
• Title and contract clearly in the holding trustee's name
• Loan agreement consistent with PCG 2016/5 (or independent evidence of arm's-length terms)
• Evidence the property is being maintained, not improved with borrowed money
• Rental income paid to the SMSF, not the holding trust or a member

07Residential vs commercial

Residential property can no longer be bought with a new LRBA, and when held by the fund it cannot be acquired from a related party or rented to a related party. Commercial property used wholly and exclusively in a business — 'business real property' — can be acquired from and leased back to a related party at arm's-length rent, and remains the only real property an SMSF can borrow to buy. That is why so many small business owners use this structure.