The Motley Fool Discussion Boards
Financial Planning / Tax Strategies
|Subject: Re: Tax loss harvesting possible with MLPs? REIT||Date: 8/6/2013 2:45 PM|
|Author: ptheland||Number: 118982 of 124497|
First, a little pet peeve of mine. Then the direct answer to your questions.
I don't like the idea of "tax loss harvesting". It makes no sense. The investment is either performing as you expected or it's not. If it's not, sell it.
When you bought the security, you should have had some idea of why you bought it. You bought it because it was undervalued or because it provided a good income stream or because it triggered some mechanical buy signal or because any number of good reasons to buy.
Likewise, there are good reasons to sell a stock. Perhaps it's business outlook changed and its future prospects aren't as good as you thought when you bought. Or perhaps the dividend got cut. Or perhaps some mechanical sell signal triggered. Or perhaps your analysis at the time you bought it was flawed. (That's a nice way of saying you made a mistake buying it.) Or perhaps you need the funds for some other purchase (which could be anything from a better investment to a vacation on the Riviera).
Noticeably absent from the list of good reasons to sell is because the investment went down. If it's still a good investment - that is, if it still fit the reason you purchased it in the first place - then there's no reason to sell.
A very common reason to buy a stock is because you think it's going to go up in value over some period of time. The problem is that you can't reliably predict EXACTLY when it's going to go up, particularly if you expect it to go up over the course of several months to several years. You may get a very significant portion of that increase in a very short time - as little as a couple of weeks.
If you sell to "harvest" some tax losses, you'll need to stay out of the investment for 30 days. I'll explain why in a moment. That could easily be long enough to miss out on a lot of gain. And if you do manage to repurchase the security near your selling price, you'll just pay additional taxes later when you do sell the next time. (Yes, there's the time value to money to consider, but that requires some detailed analysis to find out how much you are really saving in taxes now AND how much more you'll pay in taxes in the future, along with a realistic estimate of what you can earn on that tax deferral in the interim.)
So, with the rant out of the way, let's address your questions.
From what I've read, tax-loss harvesting does not work with MLPs. One person online suggested it can actually accelerate taxation. Is this correct in most scenarios in which one would sell MLPs that are down?
First off, partnerships are not like stocks in any way. With a partnership, you report your share of the partnership's income or loss every year - even if that income is not distributed to you. The distributions from a partnership are generally not taxable income - they are a return of your capital investment. So you figure your gain or loss on a partnership very differently from a stock.
Your basis in a partnership investment goes up and down each year. You start with your original purchase, add in any income the partnership passed through to you, and you deduct any losses or deductions passed through along with any distributions from the partnership. (Plus a whole boatload of other potential adjustments which I'm glossing over to keep things simple.) This is your adjusted basis in the partnership. When you sell a partnership interest, you do not look at the original purchase to determine your gain or loss, you look at this adjusted basis.
You also have to include your share of the partnership's income and/or losses through the day you sell. You won't know those amounts unless you've been following the partnership's repor