Every single time I go to a real estate seminar or read one of the less serious books on the subject I keep hearing one thing only: tax minimisation. Nothing puts bums on seats like some guy promising to tell you how to cut your tax bill. As this is clearly the main focus of real estate marketers it it worthwhile to compare the tax efficiency of property vs shares.

First of all, negative gearing. It is true that negative gearing is a tax efficient way to invest. You claim a 100% tax deduction on the interest costs immediately, and yet only have to pay capital gains tax on half the gain - and that could be never if you don't sell.

Discounted capital gains tax applies to both property and shares. Nothing to split them here.

Negative gearing applies to any investment type, you certainly aren't limited to residential property. You can just as easily buy a large portfolio of shares, index funds, active managed funds, property trusts and other things using your home equity and a margin loan. The interest will be tax deductible in the same way. So this is another neutral point, neither favouring property or shares.

Don't get too oversold on negative gearing though, remember that it is a loss. It is a real loss, you get a little bit back out of your tax but this is just a consolation prize. If I had a choice between making a loss and a profit I would go for the latter every time, even if I end up having to pay more tax. As a financial planner I can make any client's geared portfolio a negatively geared one: I just need to charge a lot more for review fees. Interested?

Real estate marketers promote the idea of accelerated depreciation allowing you to claim tax deductions. There is some tax efficiency here because you get to subtract some money off your taxable income without necessarily having incurred an actual cash expense. On the other hand don't get too excited about depreciation because it does eventually relate to costs. You claim the cost of the fittings over many years because fittings wear out and need replacing eventually. Even the building depreciates, the value of the building will eventually get to a point of being a demolition job.

Depreciation is nothing more than an accounting process where you write off the value of things over time. If you are that serious about claiming tax deductions on depreciation I know an even faster way of getting the deduction you crave, and that would be to buy a house and demolish it straight away, claiming an immediate tax deduction as you write the entire value of the house off in one day. You would get your tax deduction alright, but I can think of better wealth building strategies than running around losing money on houses.

Clearly depreciation is not something to get too excited about. In an ideal world things wouldn't break at all and you wouldn't have to depreciate them. This would destroy the much vaunted tax efficiency of property, but it would make it a lot more profitable.

Shares don't have depreciation, they have franking credits (also known as dividend imputation). This is frequently promoted as a way to reduce tax, but I don't really think of it as one.

As a shareholder, you own a part of the company. You are entitled to a share of the profits, and the company pays tax on its profits. The company pays 30% tax at the moment, which means if they make $1.00 per share in profit, they will pay 30c tax and pay a fully franked dividend of 70c. When you gross up your dividend to include the franking credit, you add $1.00 per share to your taxable income, but then claim credit at the end for 30c tax paid.

The effect of dividend imputation is that you pay tax at your normal marginal tax rate on the pre-tax income you receive from your company. This is "efficient" because if there was no imputation you would first pay 30% with your company and then up to another 48.5% after that in your own pocket. Unfranked dividends are "inefficient".

If you formed a company to invest in property, your company would pay 30% tax and then pass the income on to you with a franking credit. There is no benefit gained, in fact you would lose a benefit because companies don't get the 50% capital gains discount.

Depreciation is obviously the less efficient out of these two, because it does, eventually, lead to actual cash costs. Having a company pay some of the tax for you is certainly nice, but makes no difference at all when you think that your bottom line would be the same if the company simply paid no taxes and let the shareholders foot the whole bill. Neither are a really big deal, but I'd say shares win on points.

The most effective methods of tax reduction are not depreciation or franking credits, there are better ways to reduce tax than that. (Like choosing the right method of claiming car expenses so within the acceptable limits set in tax law you claim a much bigger deduction than your real expenses, like exploiting salary packaging and paying tax at FBT rates which are cheaper than income tax rates, income splitting to make better use of low marginal tax rates for lower income earners, infrastructure bonds (not easy to get), special schemes that take advantage of special deductions like agribusiness, research, alternative energy and films (if you can avoid the dodgy ones), tax structures like companies and family trusts to distribute money where it will be least taxed, setting up a testamentary trust to save your estate a lot of money, and making the most of superannuation).

The only real thing that separates shares from property as far as tax goes is that the return from shares comes mostly from capital gains, but the return from property comes mostly as income. Capital gains are generally more tax efficient than income because capital gains tax can be deferred indefinitely by holding off selling and also attracts a discount for long term investors (unless you are a company), whereas income is taxed in the year it is received. On that basis, shares are more tax efficient than property.

Bear in mind that the reason why real estate is so often promoted as a way of reducing tax is simply because that is an appealing marketing angle. Certainly it isn't a bad investment from a tax point of view, capital growth assets are always more tax efficient than interest paying investments that are totally inefficient where you pay tax on the full interest bill in the year it is incurred. The focus on tax minimisation is a fraud, property holds no special tax advantages over other asset classes.