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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 income is also UBTI, then yes, the recapture item would also be UBTI.

Secondly, on the sale of the units themselves, there is the potential for some or all of the sale to be treated as ordinary income because your share of the partnership's potential gain from the sale of "hot assets" (ordinary income items) is imputed to you on the sale. And you don't REALLY know what that is, until you get your final K-1 for the year of sale.

But beyond that, a gain on the sale of the shares themselves should not be UBTI.

I think an easier approach is to keep LP shares in your personal/taxable account, and keep the IRA for stocks, bonds, and even REITS should be OK.

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