The timeless question: Stocks vs. Property
Brokers and realtors have argued for decades. What does AI say about gearing into property vs stocks?
My prompt:
hey Steve -- the income from a rental property paying 4% is fully taxable. The income from blue-chip Australian shares is already tax-paid at 30%. Compare the tax effectiveness of borrowing $700 000 to invest into property versus borrowing $200 000 to invest into shares
Response
To compare the tax effectiveness of borrowing to invest in property versus shares, let's analyze:
?
Scenario 1: Borrowing $700,000 for Rental Property
Rental Yield: 4%
Annual Rental Income: $700,000 × 4% = $28,000
Tax on Rental Income: 100% taxable
Assume Marginal Tax Rate: Let's use 37% as an example
Tax Payable on Rental Income: $28,000 × 37% = $10,360
Net After-Tax Income: $28,000 - $10,360 = $17,640
?
Scenario 2: Borrowing $200,000 for Blue-Chip Australian Shares
Dividend Yield: Assume 4%
Annual Dividend Income: $200,000 × 4% = $8,000
Franking Credits: Australian blue-chip stocks are franked at 30%, so:
Franking Credit = $8,000 × 30% / 70% = $3,429
Grossed-up Dividend = $8,000 + $3,429 = $11,429
Tax Payable at 37% = $11,429 × 37% = $4,230
Franking Credit Offset = -$3,429
Net Tax Payable: $4,230 - $3,429 = $801
Net After-Tax Income: $8,000 - $801 = $7,199
?
Comparison of Tax Effectiveness
?
Key Takeaways:
Shares Are More Tax-Effective: Even though the property generates more after-tax income in dollar terms, the share investment is taxed at a significantly lower rate due to franking credits.
Higher Debt Exposure in Property: The property scenario requires a significantly higher loan ($700,000 vs. $200,000) to achieve a higher cash return.
Franking Credits Reduce Tax Liability: The ability to offset tax via franking credits makes shares a more tax-efficient income stream.
Leverage Consideration: Borrowing $700,000 for property may introduce greater financial risk, compared to borrowing $200,000 for shares.
Follow up prompt:
OK, what about allowing for the deductibility of the loan repayments at 7% interest and 10 years of capital growth?
can we then compare how much more effective the stock strategy was compared to the property, as in: borrowing one-third as much for a stock loan, bringing in almost 50% of the after-tax income
Updated Scenario Analysis
Assumptions:
Interest Rate on Loan: 7% p.a.
Loan Term: Interest-only for simplicity
Capital Growth (per year):
Property: 5%
Shares: 7%
Tax Rate: 37%
Franking Credit on Shares: 30%
Investment Duration: 10 years
?
1?.?????? Property Investment ($700,000 Loan)
Annual Cash Flow Impact
Rental Income: $28,000
Interest Cost: $700,000 × 7% = $49,000 (fully tax-deductible)
Tax Deduction (37% of interest expense): $49,000 × 37% = $18,130
Tax on Rental Income: $28,000 × 37% = $10,360
Net After-Tax Position (Cash Flow):
Rental Income ($28,000)
Minus Interest Cost ($49,000)
Plus Tax Savings ($18,130)
Minus Tax on Income ($10,360)
= -$13,230 (negative gearing loss)
?
Capital Growth Over 10 Years
Property Value After 10 Years:
$700,000 × (1.05)^10 = $1,141,000
Equity Growth (Capital Gain):
$1,141,000 - $700,000 = $441,000
Capital Gains Tax (CGT) at 50% discount:
Taxable Gain = $441,000 × 50% = $220,500
Tax Payable = $220,500 × 37% = $81,785
Net Capital Gain After Tax:
$441,000 - $81,785 = $359,215
?
2?.?????? Stock Investment ($200,000 Loan)
Annual Cash Flow Impact
Dividend Income: $8,000
Interest Cost: $200,000 × 7% = $14,000 (fully tax-deductible)
Tax Deduction (37% of interest expense): $14,000 × 37% = $5,180
Franking Credit Impact:
Grossed-up Dividend = $8,000 ÷ 0.7 = $11,429
Tax Payable = $11,429 × 37% = $4,230
Franking Credit Offset = -$3,429
Net Tax Payable = $801
Net After-Tax Position (Cash Flow):
Dividend Income ($8,000)
Minus Interest Cost ($14,000)
Plus Tax Savings ($5,180)
Minus Tax on Dividends ($801)
= -$1,621 (negative gearing loss)
?
Capital Growth Over 10 Years
Stock Value After 10 Years:
$200,000 × (1.07)^10 = $393,000
Equity Growth (Capital Gain):
$393,000 - $200,000 = $193,000
Capital Gains Tax (CGT) at 50% discount:
Taxable Gain = $193,000 × 50% = $96,500
Tax Payable = $96,500 × 37% = $35,705
Net Capital Gain After Tax:
$193,000 - $35,705 = $157,295
?
Final Comparison Table
?
Key Takeaways
Property Delivers Higher Absolute Returns ($226k vs. $141k), But Requires 3.5x More Borrowing
You’re leveraging $700,000 in property to achieve $226,915, while only needing $200,000 in shares to generate $141,085.
Per dollar borrowed, shares return $0.71 vs. property at $0.32.
Shares Generate Almost 50% of Property's After-Tax Return With One-Third the Debt
?
Shares require 1/3rd of the loan size yet deliver 62% of the total after-tax return.
The leverage risk is lower, and your debt exposure is far more manageable.
?
Negative Gearing on Property Is Much More Severe
Property cash flow loss: -$132,300 over 10 years
Stock cash flow loss: -$16,210 over 10 years
You need more cash to sustain a property investment.
?
Shares Are More Tax-Efficient
Franking credits massively reduce the tax burden.
Even with dividends, the total tax paid is far lower than property.
?
Final Verdict:
Stock Strategy Was More Effective
You borrow 1/3 as much for shares.
You generate 50% of the property’s total after-tax return.
You endure way less negative gearing pain.
On a per-dollar basis, stocks return 2.2x more per borrowed dollar than property ($0.71 vs. $0.32).
?? Unless you expect a property to appreciate significantly faster than shares, the share strategy is the clear winner in terms of tax efficiency and capital growth efficiency.
?
?
?