Tax Aware

Levering Up to Do Good

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Levering Up to Do Good

Donating appreciated stock, instead of cash, may help amplify the benefits of charitable giving. The charity gets the full market value of the appreciated securities — as opposed to the after-tax value (that is, the value reduced by liquidation tax) — and the donor receives a tax deduction for the full amount gifted while potentially avoiding liquidation tax. 1 1 Close Assuming that the gifted position is a long-term position, held for more than one year. Deductions for short-term positions, held for one year or less, are only allowed up to the cost basis.   In other words, gifting appreciated stock allows a donor to do good while managing taxes at the same time. 

But it doesn’t end there. Charitable giving programs implemented on top of tax-loss harvesting strategies, like direct indexing, can potentially be even more effective for the donor. As the strategy’s most appreciated positions are donated, its ongoing tax benefits typically increase, and expected future tax liability typically declines. This can be especially true if new capital is added to replace donated positions.  

Our latest paper finds investors who want to "do good” may be able do even better.

We’ve written before that long/short strategies may outperform
traditional approaches, both before and after taxes. So, it shouldn’t come as a surprise that they can also be a game-changer for charitable giving. Our new paper covers four distinct advantages for long/short investment strategies over direct indexing, but for brevity (this is a blog, after all) here are two big ones: 2 2 Close Very briefly, the other two: levered long/short strategies can have achieve greater capital loss realizations, and as leverage increases (e.g., from 150/50 to 250/150), donations offer the investor more flexibility to modify the levered strategy to a long-only portfolio.

  • For the charity: Greater donation amount. As a strategy’s leverage increases, so does the value of the long positions relative to invested capital. As a result, the value of positions that can be donated increases as well. For example, compare a long-only portfolio to
    one that is 200 long and 100 short. In the latter case, the value of
    long positions that can be candidates for donation increases by a factor of 2.   
  • For the donor: Greater donation “efficiency.” Because levered strategies have larger positions than unlevered strategies, they can also accumulate larger amounts of unrealized gains. This means that for a given donation amount, the levered portfolio will tend to have more unrealized gain to dispose of. Said another way, long/short levered strategies can allow for more efficient reduction in an investor’s future tax liability per dollar donated.  

Taken together, long/short tax aware strategies can be a win-win for the charitably inclined: larger donations for the charity and larger tax benefits for the donor. Therefore, the paper concludes: “Families planning on doing good should consider levering up.”

 

This document is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein.

 

This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and AQR Capital Management, LLC (“AQR”) to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. This document is not to be reproduced or redistributed to any other person. The information set forth herein has been provided to you as secondary information and should not be the primary source for any investment or allocation decision. Past performance is not a guarantee of future performance. Diversification does not eliminate the risk of experiencing investment losses. 

This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein. 

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Diversification does not eliminate the risk of experiencing investment losses.

The information in this paper may contain projections or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.