A master limited partnership (MLP) is a hybrid between a partnership and a publicly traded company. There are significant tax advantages to owning MLP units. However, despite these benefits, MLPs may not be the ideal investment for an individual retirement account (IRA).

Understanding Master Limited Part♕nerships (MLPs)

澳洲幸运5官方开奖结果体彩网:Master limited partnerships (MLPs) offer significant liquidity for investors. An investor can buy and sell units through a 澳洲幸运5官方开奖结果体彩网:national stock exchange. Many MLPs operate capital-intensive businesses, such as 澳洲幸运5官方开奖结果体彩网:oil and gas pipelines and storage facilities—the 澳洲幸运5官方开奖结果体彩网:energy sector.

Congress limited the use of MLPs to entities operating in certain sectors in 1987. This limitation includes those operating businesses associated with natural resources. MLPs issue units, as opposed to shares, as standard companies do. An investor who buys units in an MLP is considered a 澳洲幸运5官方开奖结果体彩网:limited partner in the business. The business end of the MLP is operated by the 澳洲幸运5官方开奖结果体彩网:general partner.

Distributions from MLPs to unit holders receive favorable tax treatment under the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Code (IRC). An MLP is a 澳洲幸运5官方开奖结果体彩网:pass-through entity, and partnership income is only taxed at the level of the partner. Distributions are not taxed when they are received, unlike stock dividends, which are taxed the year they are realized. Instead, the distributions are considered a reduction in the 澳洲幸运5官方开奖结果体彩网:cost basis of the MLP investment. If you hold the MLP long enough and your cost basis reaches zero, distribut🐭ions are taxed as capital gains in the year of distribution.

Tax Liability

The 澳洲幸运5官方开奖结果体彩网:tax liability from the distributions is only realized when the interest in the MLP is sold. The delay in taxation causes the MLP to be a 澳洲幸运5官方开奖结果体彩网:tax-deferred investment. When you eventually sell all of your shares, appreciation of the units will be treated as 澳洲幸运5官方开奖结果体彩网:capital gains, not ordinary income.

Since 澳洲幸运5官方开奖结果体彩网:MLP tax liability is deferred, it is not the best candidate to hold in an IRA. Income from an MLP is not taxed at the corporate level, which avoids the common problem of 澳洲幸运5官方开奖结果体彩网:double taxation for corporations. At tax time, the investor receives a 澳洲幸运5官方开奖结果体彩网:Schedule K-1 from the MLP stating the investor’s portion of the MLP’s 澳洲幸运5官方开奖结果体彩网:net income. This MLP income is not tax deferred if the units are held in an IR♉A. Holding this security in an IRA eliminaꦐtes the tax benefits of an MLP investment.

A downside of holding MLPs is that many of them invest in pipelines that run through several states. You may have to pay state 澳洲幸运5官方开奖结果体彩网:income taxes, but some states offer exemptions.

The Bottom Line

Master limitedꦇ partnerships can offer attractive tax advantages, making them a popular investment choice for those seeking income-generating assets. Because of how taxes are structured, MLPs are not suitable for all investment accounts, especially IRAs.

It’s important for investors to understand the federal and state tax implica𝓡tions before investing in MLPs.