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Author: culcha Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121594  
Subject: Master Limited Partnerships Date: 8/26/2012 12:07 AM
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I'm doing some reading about MLPs, and I have a couple of tax-related questions. First, is it true that the sale of an MLP will trigger a lot of recapturing (and therefore taxes), especially if the MLP has been held for a long time? Is this equally so whether the MLP has been held in an investment vehicle such as a TIRA or a Roth or a taxable account?

I see different people recommending different things about putting MLPs in an IRA of any kind; some say that's a good place for them; some say not. Is one of these views the right one -- or could different investors do well either way?

And, if there is this problem about recapturing, suppose I just keep the MLP until I die, using it for income in retirement, and then let it pass to my heirs. Would they get a step-up in basis and be able to turn around and sell it immediately, thus avoiding any recapturing (and tax) problems? If this is my plan, would that help to pinpoint what kind of account would be best (TIRA, Roth or taxable)?

TIA!

culcha
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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116552 of 121594
Subject: Re: Master Limited Partnerships Date: 8/26/2012 2:00 PM
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Many Master Limited Partnerships generate Unrelated Business Taxable Income. This is shown on the K-1 you get every year. If you get more than $1000 of this in a year, it is taxable even though the MLP be held in an IRA.

In an IRA, you don't pay capital gains buying or selling. You pay tax at your marginal rate when you withdraw the money.

I do hold several MLPs. Most, even though the partnership itself is profitable, have UBTI small or negative. So it actually wouldn't matter, and would save the trouble of wrestling with the K-1s every year. However, the partnership itself is by its nature tax-advantaged, so in that sense it wouldn't make sense to hold it in an account that also is not taxable.

Best wishes, Chris

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116553 of 121594
Subject: Re: Master Limited Partnerships Date: 8/27/2012 10:16 AM
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I'm doing some reading about MLPs, and I have a couple of tax-related questions. First, is it true that the sale of an MLP will trigger a lot of recapturing (and therefore taxes), especially if the MLP has been held for a long time? Is this equally so whether the MLP has been held in an investment vehicle such as a TIRA or a Roth or a taxable account?

It all depends on the specific MLP, its business, and how all of the accumulated income/expense items have been treated during the period of ownership. A sale within an IRA (any flavor) will be simpler because you don't need to keep track of all of these items.

I see different people recommending different things about putting MLPs in an IRA of any kind; some say that's a good place for them; some say not. Is one of these views the right one -- or could different investors do well either way?

I don't think there is a "one size fits all" answer.

And, if there is this problem about recapturing, suppose I just keep the MLP until I die, using it for income in retirement, and then let it pass to my heirs. Would they get a step-up in basis and be able to turn around and sell it immediately, thus avoiding any recapturing (and tax) problems? If this is my plan, would that help to pinpoint what kind of account would be best (TIRA, Roth or taxable)?

While they would get a step-up in basis, they wouldn't avoid the problems because each day of ownership generates a small amount of every tax-related item on the K-1. Since the estate can't sell on the date of death (since there is no one legally authorized to act on behalf of the estate until the will is probated, or in the case of TOD accounts a certified death certificate is produced), there will always be some level of adjustment required.

I haven't researched the following statement so it may be wrong. There is the risk that they could lose the benefit of accumulated losses which would vanish upon death.

The answer to all of your questions would best be provided by a consultation with a professional tax advisor who could review the entirety of your tax situation.

Ira

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Author: no2cattx Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116561 of 121594
Subject: Re: Master Limited Partnerships Date: 8/29/2012 5:47 PM
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Here are some links to a few folks who have researched the UBTI question. It's difficult to find a difinitive answer and I suspect different tax professionals may have different opinions. I have decided to sell at least part of the MLPs I own in my IRA because of this issue. It's not the $1000/yr. that's a problem, it's the opinion of some that as your cost basis decreases, your distributions become UBTI, and when you sell, you also have the issue of UBTI on ordinary gain.

Here's a quote from an article about MLP questions on a site called MLP HINDsight:

"UBTI recapture in an IRA? When you sell an MLP in any account, there is ordinary income recapture. But in an IRA, is there anything such as UBTI recapture? In other words, beyond the annual UBTI tax (assuming you are above the $1,000 threshold) is there some cumulative UBTI tax that is triggered when I sell an MLP I have owned for a long time in an IRA?
•When you sell an MLP in a regular taxable account, the difference between your original purchase price and your adjusted basis (adjusted down for distributions, and up for allocated income) is recaptured at ordinary income tax rates. The difference between your selling price and the original purchase price is taxed at capital gains rates.
•When you sell an MLP in a IRA or otherwise tax-exempt account, the part that would have been considered ordinary income recapture above would be taxed at UBTI’s graduated tax rates (for any amount above $1,000). So, there are two components of UBTI: the annual UBTI that gets allocated each year, and there is the UBTI recapture upon sale."

http://mlpguy.com/archives/1387

Some other thought-provoking (or maddeningly frustrating) articles on the apparently quite complicated subject (be sure to scan the comments):

"MLPs and Your IRA: Home at Last" (I suggest reading this one first.)
http://seekingalpha.com/article/313008-mlps-and-your-ira-hom...

"Master Limited Partnership: Your IRA Choices"
http://seekingalpha.com/article/525861-master-limited-partne...

"Master Limited Partnerships: Planning and the Death Tax"
http://seekingalpha.com/article/546221-master-limited-partne...

"Master Limited Partnership and Your K-1"
http://seekingalpha.com/article/512001-master-limited-partne...

Vicki

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