Basic Tax Principles for MLP Investors


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Owning units (shares) in an MLP is different from owning corporate stock in a number of ways, most notably their taxation. That is because an MLP is a partnership, and you, as an investor, are a limited partner.  To understand how an MLP investor is taxed, it helps to know the basic principles of partnership taxation.

Partnership Tax Basics: Income

Partnership Tax Basics:  Distributions

Partnership Tax Basics:  Basis Adjustments

Partnership Tax Basics: Gain and Recapture 

Simplified Example

Year 1:  1,000 units purchased @ $30.00.  Basis is:

$30,000

Investor receives total cash distributions of $2.50/unit 

- $2,500

Investor is allocated and pays tax on net taxable income of $.50/unit, including $2.00 of income and $1.50 of depreciation

+  $ 500

Adjusted Basis

$28,000

Year 2:  All units sold @ $32.00

$32,000

Gain per unit:  $32.00 - $28.00 = $4.00

$ 4,000

Depreciation recapture-taxed at ordinary income rates

$1,500

Taxed at capital gain rates*

$2,500

*Assumes MLP has no “ordinary income” assets

 

This fact sheet is for informational purposes only and should not be construed as offering tax advice. Consult your tax advisor regarding your own situation.