I tried to research this question, but seem to have found some possibly conflicting info. Can someone please describe what happens to you tax-wise after you have held LINE shares for more than 1 year? I think I understand the tax-advantaged nature of the distributions in the near term, but do you get capital gains treatment if you hold these shares for more than 1 year like other stocks? Relatedly, if you do get cgains treatment, is that true of all your distributions or only those distributions made more than 1 year prior to sale? Thanks in advance for your guidance.
I own shares of LINE and BBEP and I am wondering if their is an opinion on which is the one to hold onto, I like LINE as it seems like a bigger and well managed MLP and BBEP seems to be pretty decent too, they just aquired more U.S. assets from Provident Energy. I probably will keep both but add some more, I also own shares of EP too.
I have been reading some of the very interesting posts here and getting good technical info from them, that is why I am putting out this question to the board here, Thanks.
Hold them both if you can. Diversification is always a good idea. The valuation numbers are pretty close. They both trade at ~15% discount to NAV (based on proved reserves - including probable reserves would increase this a lot). Distributable cash flow is around the 11%-12. Both have about 55% NG and 45% gas and NGLs.
LINE probably has more upside in a super-high oil/gas price scenario - since it has more unhedged PUD reserves.
Personally, I own and like both. I haven't really evaluated them one directly against the other as I own the two of them to diversify across companies in the same business. I own more LINE, but that is partly due to the fact that I bought it when it was seriously undervalued and have made no attempt to rebalance (in large part for the reasons discussed below).
If I didn't have to sell, I'd probably keep holding them both -- which is what I am doing.
I don't know you tax basis or other data (which might affect the analysis for you personally), but consider that selling can cause the recognition of ordinary income (prior distributions) that has previously been deferred. Part of the consideration has to be the tax effect of the sale, assuming all other considerations are equal.
As I noted in an earlier post, if you bought units in chunks instead of one purchase, the tax basis for MLP units is a conglomeration of the tax basis of all units purchased. Which, if I understand all of this correctly, means that on a sale of part of the whole position, you may have to recover more of the deferred distributions than just the distributions that would be allocable to the units you sell. Check with your CPA.
When I look at my personal holdings and figure that a sale can trigger thousands of dollars of ordinary income deferred from prior years, holding looks better to me, especially when the investment looks undervalued and likely to do better going forward.
Anytime you sell an investment, ask yourself "Why"? And then ask yourself if there is a better place to put the money. If the answer to the second question is "No", then reexamine the "Why". The answer may still be valid (e.g., you think there is a problem with the entity's business or that it will drop in price), but think it through. If you sell and have to pay taxes, you have less money left to invest in the alternative investment and so it would have to have a assumed higher rate of return to get you to the same place (net worth-wise) as just holding.
I hope you make a good decision after evaluating all the factors.
You might also look at these sources for more information on taxation of partnersip interests. It does seem that taxation of partnerships can be as simple or as complicated as one has the time and energy to make it.
This tax question has some wrinkles to it. I will give it my best shot using examples, but I am not a CPA and I will leave to others any correction of errors.
Say you bought LINE for $19 on April 1, 2008 and sell on April 2, 2009. I will assume for theake of simplicity that LINE has zero taxable income and zero loss to allocate to you so that the distributions were not taxable to you.
You would collect four quarterly distributions of $0.63, or $2.52.
Your tax basis of LINE would be your original cost of $19.00 minus the distributions of $2.52, or $16.48.
Your capital gain or loss is computed by comparing the original cost, $19, to the sales price.
Assume a sales price of $25. If you compared that the your tax basis of $16.48, you'd have total gain of $8.52. But capital gain is computed by the increase in sales price over the original cost, $25 minus $19, or $6.00. The remaining $2.52 is ordinary income, the recoupment of the distributions.
Assume a sales price of $18. Compare that to your tax basis of $16.48, you'd see a total gain of $1.52. But there are two components, capital gloss and ordinary income. The capital loss is determined by comparing original cost, $19 to the sales price of $18. So there is a $1 capital loss. But your total gain is supposed to be $1.52. Well, there wouild be $2.52 of ordinary income, equal to the distributions previoulsy received. The capital loss of $1 and ordinary income of $2.52 equal $1.52 net gain.
Things get more complicated if you sell only part of your holdings or buy in multiple purchses since MLP tax basis is spread across all units, you don't use specific identification or FIFO of units as in corporate stock.
I like your second example, but others have told me that amounts recaptured as ordinary income are limited to your net gain. In your example that would suggest reporting $1.52 as ordinary income and no capital gain. Now the net effect is the same most of time, but suppose you had a large loss carrover and therefore could not use the capital loss and had to carry it forward. You would pay more in taxes this year using your method (and possibly less in some future year when you were able to apply the carry forward loss against other gains or income). I have no idea which way is the correct way and I guess that points out some of the tax complexities of MLPs