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Subject:  Re: MLP in IRA recapture question Date:  3/6/2013  7:29 PM
Author:  Wradical Number:  117969 of 123001

I've been learning a lot about master limited partnerships (MLPs) lately. I have an IRA that has some units of an MLP. Thankfully this specific MLP doesn't produce year-to-year unrelated business taxable income (UBTI) as UBTI is taxed, even in an IRA for amounts that exceed $1000 per year.

OK, so far so good.

That is nice but, my MLP units do pay quarterly distributions that "adjust" my taxable cost-basis downwards relative to my "original" cost-basis.

Yes, but I hope you're aware that's only half the story. Your basis is also adjusted by your share of the partnership's income/gains/losses, etc. (increased for income, decreased for losses.)

The difference between my "adjusted basis" and my "original basis" is something called "recapture" and, upon the sale of the MLP units, this "recapture" is subject to taxation, even in an IRA. However, it is my understanding that "recapture" is classified as UBTI.

Not exactly. First of all, the partnership itself may have recaptured gains. "Recapture" is a reclassification of gains from capital gain to ordinary income, usually attributable to depreciation and depletion deductions (which are thus "recaptured.") This would be reflected in your regular K-1 entries. And, to the extent that your ordinary inco