OldNavySailor

Master Limited Partnerships: An Island of Stability for Dividend Investors

Beware fellow investors!

If you hold MLP's or LP's in a tax deferred account such as an IRA, you may be liable for paying the evil UBTI tax (Unrealized Business Taxable Income). If the sum total of UBTI across your MLP/LP investments exceeds $1,000.00, you will have to pay tax even though you did not sell the stock. You will have to apply for a tax id and the process is not simple to comply with the tax code.

Look at section "V" (usually) on your K-1. Many companies show a negative value, but some are positive. For details see page 2 of IRS publication 598, "Tax on Unrelated Business Income of Tax Exempt Organizations".

Why Buy MLPs?

MLP's as part of your IRA have one negative aspect: the evil UBTI (Urealized Business Taxable Income) tax!

If the sum total of UBTI for all your MLP's held in an IRA exceeds $1,000 annually, you will have to pay tax; even though the account is an IRA. Most of the MLP's I hold in my IRA have a negative UBTI so I never have had to pay any tax. But if you do, you will have to get a separate tax ID to file.

Look at your K-1's for the past year at line item 20: OTHER INFORMATION. Usually UBTI is coded using the letter "V".
If it is negative, you're okay. It the income is positive, it can be offset with other MLP UBTI that is negative. If you exceed the threshold of $1,000. you owe the tax. So, watch out!