Master Limited Partnerships

[David]

Can anyone direct me to a good source regarding taxation of MLPs?

 

A client's financial advisor is recommending an MLP, among other options, for retirement planning. My client is in his late 50s.

 

Everything I read regarding MLPs cautiions the investor about the complexities of the taxation of their MLP investment. I don't see why the caution is prevalent in every article regarding MLPs. The K-1s are no different from other PTPs. Or am I missing something?

 

I no longer have acces to Intelliconnect since I haven't renewed. I checked the IRS website and found nothing.

 

Thanks for your help.

[taxxcpa]

The main thing is to keep income below$1000 in an IRA.

[Randall]

Some fund companies are offering funds investing in MLPs where the investor does not receive K-1s. It's a way for this investment exposure and by-pass the K-1 hassle. Something they might want to look into.

[SaraEA]

I'll assume this will be in a taxable account (not retirement acct).  Losses from a specific MLP cannot be used to offset gains from other investments (including other MLPs).  They will carryover and can only be used against eventual gains in that specific MLP.  In my experience these investments typically show losses.  The partners get distributions of course, but in the absence of income these are treated as a reduction in basis (something like a return of capital).  The gains come when they eventually sell, which I have found to be a nightmare to calculate.

 

Taxxcpa is right to be wary of investing in MLPs in retirement accounts.  MLP income is considered "unrelated" and if over $1k total the IRA will have to file and pay tax.  This won't affect you the preparer because the IRA custodian will have to do it (at great cost to the client).

[michaelmars]

these get recommended because they are high commissions to the broker.

[David]

Thanks for your help with this.

 

Regarding the reduction in basis from the distributions and the gain at the time of sell - I read that the tax on the distributions is deferred and when the MLP interest is sold the distributions are taxed at the TP's ordinary rate and not LTCG rate.

 

I thought the gain would be taxed at the LTCG rate. Why isn't this treated the same as the gain from sale of a Partnerhip?

 

Thanks.