Lessons from Buffett’s Tax Return

by on March 9, 2012  •  In Warren Buffett

The investment management industry has a nasty habit of ignoring the effect of taxes upon returns – mainly because the biggest and most important clients don’t care about pre- vs. after-tax returns (pensions, endowments, foundations, etc.)

PM Jar does not agree with this common practice. As a result, our Readers will continue to find posts related to effective and creative tax minimization strategies in a portfolio management context.


On the topic of taxes and leverage/margin in a portfolio context, my thoughts brought me back to an old WSJ article on Buffett’s tax return.

There’s lot of speculation in the article, but one particular section stood out:

“Another large element of the gap could be attributable to investment interest expense, which is deductible to the extent that Buffett had investment income—and he did. According to a person familiar with the matter, in the past he has taken out bank loans rather than liquidate shares from his Berkshire Hathaway holdings, which would be a taxable event. Obviously he qualifies for excellent interest rates. Interest expense could also flow through from investment partnerships such as hedge funds.”

Given today’s low interest rate environment (and since interest is tax deductible), could this be a lesson to all of us? Obviously Buffett is older and can use leverage/margin to defer sale of securities until his death. For the average investor, perhaps we should consider using margin or leverage (selectively and prudently) to manage around tax sensitive date thresholds (for example, short-term vs. long-term capital gain).

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