Property v shares: Doing the numbers on what's best

Twenty years ago we decided a residential property would be a good investment, and settled upon a suburban unit close to transport.

We paid $220,000. Fifteen years ago when the tenant left, I rented the property to an elderly lady who was a long-time friend. I charged her a reasonable rent, and because she was the perfect tenant, I was loath to increase it.

Recently she moved to aged care, and I took the opportunity to reflect on the investment. The key to success in real estate is to add value, which is hard to do with an apartment: they tend to lose their charm as time passes and more modern units become available. Two decades have passed since we bought it, and at this stage in my life I'm over rental property, so have decided to sell.

Agents tell us $550,000 is the going rate, so we'll have more than doubled our money.

For interest, I ran the numbers through the stock market calculator on my website and discovered that if I had invested $220,000 in the All Ordinaries accumulation index 20 years ago, I would now have $1.23 million.

That's a compound gain of 9 per cent per annum. And there's more. Instead of getting a taxable income of $500 a week rent - less outgoings such as body corporate fees, rates, insurance, and land tax - that $1.23 million in an index fund would be returning $55,530 year, or $1063 a week. The cream on the cake would be that the income would be almost tax-free, thanks to franking.

Then I had a quick look at my capital gains tax liability: I started with a back-of-the-envelope calculation that $530,000 less a base cost of $230,000 cost would create a taxable gain of $300,000, which would come back to $150,000 after the 50 per cent discount, and then be split $75,000 to my wife and myself as joint owners.

That hurt, but it got worse when I checked out the purchase file. On the accountant's advice we had negotiated the purchase price to be split $140,000 for land and buildings and $80,000 for depreciable items.

The thinking was that it is always better to take a tax deduction sooner rather than later. True, but your base cost is going to be only $140,000 because we have enjoyed 20 years of tax deductions; that increased the taxable capital gain by $80,000.

Next I started to think about timing. There are tax cuts coming on July 1, so it would be smart to delay any sale until after that date.

The unit needs refurbishing by way of new carpets and paint, and it would be impractical to lease an unfurnished unit for a short time. So I'm looking at least six months with no income. Since I'm now right into selling mode, and want the sales proceeds in our bank account as soon as possible, the last thing we want is a tenant who won't leave.

This experience has reinforced what I've been saying for years: as you get older, your best investment is shares - not property.

Shares give you tax-advantaged income and can be sold in whole or in part within a few days. With property, you have income with no tax advantage, lots of regular expenses, and if you need money, you can't sell the back bedroom.

Here's to a healthy and prosperous New Year.

Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: noel@noelwhittaker.com.au

This advice is general in nature and readers should seek their own professional advice before making any financial decisions.