If, by “domain masking” (which isn’t an industry standard term in SEO but it is used by some domain hosting companies) one means redirecting a visitor from domain1.com (for example) to domain2.com with the domain1.com address still showing up in the browser’s address bar, then it is widely considered to have a negative effect on your site’s search engine rankings.
On rare occasions there may be a legitimate reason for a website owner to use such a technique but if search engine rankings and long-term success of domain2.com are of importance to the owner, then it should be approached with caution.
The problem is, spiders see nothing more (and often much less) than your browser does. If the spider sees the content for domain2.com but domain1.com is the address it believes it’s seeing in address window then then what happens when the spider actually arrives directly to domain2.com from some other link on the web? It sees the exact same content on that domain as it saw when it thought it was on domain1.com. So you have duplicate content issues–not an ideal situation for SEO.
The other issue you have is back links. If people find the content on “domain1.com” interesting they may link to it, which may help it in the rankings. If people find the content on domain2.com interesting, they may link to domain2.com and that may help that site in the rankings. The problem is, your main site is only getting half as many links as it could be if everyone was linking to that one single site. Meanwhile, your competitors with linkable content are getting 100% of their links going to a single domain, giving their one site twice the ranking power of either of your two sites.
I’ll typically advise my clients not to use a strategy of forwarding a visitor in this fashion. Putting content on single domains tends to be time better spent and when you do have to redirect a visitor, be aware that a 301 redirect is often your best choice.
