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I read in this months SmartMoney magazine that energy MLP's are yielding around 8% tax free. This sounds like a great tax free yield. What is the catch????

Part of the catch is that the 8% current cash yield is possible because of noncash expenses like depreciation, amortization (and depletion, in the case of energy partnerships). Distributions in excess of the partnership's income are tax-free currently, because they represent a return of capital.

The distributions you receive from a partnership are not income, but a reduction in your basis in the partnership. Instead of a 1099, like you get for stock dividends, you will get a Schedule K-1, showing your share of the partnership's income or losses. (A partnership does not pay taxes, the partners do.)

Because of this, your basis of your partnership interest changes every year. And it will make your tax returns more complicated. Losses may not be currently deductible because of the passive loss rules, but have to be carried over to future years.

Another problem: marketability. You may not be able to sell your investment when you want. The broker who sold it to you, or the other partners, may be your only market. Some are publicly traded, but you have to see what you're getting into. It's a different deal than buying and selling stocks.
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