If you hold for long enough, your basis could eventually reach zero. Once that happens, any future distributions are treated as capital gains in the year in which they are received. The sale of an MLP could result in both a capital gain and ordinary income for the investor.
How are capital gains taxed in a MLP?
Herein lies the true benefit of MLPs, because long-term capital gains taxes are much lower than regular income tax levels. For the vast majority of investors, the capital gains taxes paid on income earned by MLPs, once the cost basis has hit zero, is 0% or 15%.
What does return of capital mean in MLP?
MLPs don’t issue dividends. Instead, the checks you get may be considered a return of capital. When you receive a “return of capital”, your basis in the investment goes down. Today, that’s awesome.
What does it mean to own 100 shares of MLP?
That means that the MLPs taxes “flow through” to the investor (or partner). You may own 100 shares of XYZ Pipeline, but in the eyes of the IRS, you are a business owner with X% of the pipeline (the K-1 statement will even show you what percentage partner you are).
Are there any tax advantages for inheriting an MLP?
Better yet, your heir will inherit the MLP at a higher cost basis, which gets readjusted to the market price on the date of the transfer. And if your heir wants to sell the MLP right away, there will be no capital gains tax. All good news so far, but as you already know, there’s no such thing as a perfect investment.
How are cash distributions taxed in a MLP?
In fact, their cash distributions are not taxed at all when unitholders receive them, which is very appealing. However, the longer an MLP is held, the more likely the cost basis will decrease, which increases the tax obligation after units are sold.
