If you own common stocks of MLP's in a normal trading account, you may have UBIT to consider. If you hold it in an IRA account you probably don't have to be concerned. My contact with the IRA revealed the following:
Final word on UBIT (from IRS conversation 9/14/11)
I finally can report how such tax is handled on such tax liability. I hold 4 MLP’s in my IRA account. The IRS tells me the following:
1/ Income tax is captured in my IRA and income taxes are paid when funds are withdrawn.
2/ Other taxes levied (including UBIT) are accountable to the tax ID on the K1s received each year. If your SS number is not in Part II box E, the IRS will not associate you to the K1 and the MLP is handling such tax liability.
3/. MLP’s are great dividend generators and should be considered in an IRA account. If you want further clarification and to verify what I have said here, Call 800-829-1040, enter option 2, then option 2 again, and then option 3. An operator will select someone in your area of concern. State the following: “I receive K1’s form 1065 yearly and wish to clarify my tax liability for UBIT from MLP common stock that I own”.
UBTI is reported on every K-1 on Line 20v, whether the account is registered as a Trust (i.e., IRA) account or not. Not all lines on the K-1 are relevant to each unit owner. For example the AMT lines are not relevant to many, and lines 1 (taxable income) or 5 and 6 (portfolio income) are not relevant to IRA owners. Its not the MLPs concern to guess who needs what info; they provide it all to each unit holder.
If anyone has sold and repurchased the same MLP in the same year they should be able to see the impact on their UBTI that you describe.
Wow, interesting discussion.
"I am fairly confident that if you repurchase in the tax year after the one you sell in you will have very successfully reset the clock. "
I can't comment on that observation, but I can report this, from personal experience -
Because I had originally purchased MLPs in whichever account I had extra cash, I wound up with MLPs spread over taxable, Trad IRAs and Roth IRAs. When I decided to reorganize my holdings so that all MLPs were in taxable accounts, (and all REITs were in tax-deferred accts), I sold assets in one type of account, (i.e. sold MLPs in Trad IRA, Roth), and bought them back in my taxable accts, (recall I raised the cash necessary to purchase them by selling REITs in the taxable accts...). When I did that all of my partnership numbers were reset...and, of course I had profits in everything I sold, so wash rules did not apply...
The same phenomena occurred earlier when I converted MLPs from Trad IRAs to Roth IRAs.
So I can say with certainty that moving between different classes of accounts does reset partnership assets. But that is about all I know, from experience, about this issue...
I usually change my mind at least twice on these types of questions. I now think you are right, Lisa.
Assuming a person bought 1,000 units of KMP eight years ago for $25 per unit, and they were now causing a UBTI liability. Assume that they sell the 1,000 units today for $75 per unit, and immediately repurchase another 1,000 units for $75,000. The individual unit holder's tax basis in the depreciable assets of the partnership would be stepped up to such a level that his tax depreciation of those assets would now be much higher as well. In this partner's tax capital account depreciation expense would be so high that it would now cause a loss rather than income, and this would result in negative UBTI.
This I firmly believe until a better explanation comes along.
"The amount of your investment they are tracking on their books is reported to you each year on your K-1 (in "Capital Account Analysis"). This is NOT the same as your basis in a stock; at any give time your "on the books" investment reflects your original invested amount, the amount of capital you have removed (i.e., taken out as distributions or through partial sales), and what has gone on with net depreciation of your pieces of the partnership"=================
Actually, the Partners Capital Account ending value is usually the same as your basis for tax purposes. (as of 12/31). Depreciation is not reflected in those figures. More accurately, it takes into account items of income and loss that are added or subtracted from your basis as well as distributions and any additional purchases or dispositions.
It's not through personal experience as I don't hold my MLPs in an IRA. However someone on the IV MLP board posted before that has has done this successfully on a number of occasions when his UBTI started going positive...said he sold and repurchased 10 minutes later and (whatever it is that the UBTI is assessed on...yes, something to do with the depreciation) got reset so that his UBTI went back down to very negative levels.
better yet, to keep it as simple as possible, buy closed end funds that only invest in mlp's. most issue you a regular 1099 dividend taxed at dividend rates. not regular income rates. but be aware, closed end funds that invest soley in mlp's are trading way above net asset value... so pick your poison, tax nightmare or best value for your dollar....
I do not believe the distributions become qualified just because they are held in a closed-end fund. The closed-end fund will issue a 1099 instead of a K-1 but the dividends will be return of capital for the 70-100% of the distributions and only qualified for dividends that are qualified in the first place.
A fund does give you diversification, but a closed-end fund will swing to a premium during boom times and a discount during bust times.
don't listen to peggy... if your ubti exceeds $1000 in your ira, well you are hosed. cause your ira owes the taxes, not you. you can't whip out the checkbook and pay the taxes. the ira has to file a tax return and pay the taxes. how are you going to do that without creating a massive headache? keep it simple and own it in a regular taxable account.
I fully disagree with your conclusions mplsmapguy2.
IMHO if you want to SIMPLIFY the tax issues with owing MLPs you can own them directly in an IRA.
1) If you own MLPs in an IRA you NEVER file a tax return on your partnership ownership, PERIOD. If your IRA receives a cumulative UBTI in excess of $1,000 in a single year your brokerage files a 990-T. Just because they file a 990-T does not mean that your IRA owes taxes...just that your IRA must file.
2) It is extremely easy to select a set of MLPs that do not create any UBTI for the first 5 years or more; in fact these MLPs report negative UBTI in the early years, which your brokerage can be roll forward to offset future positive UBTI from the same MLPs, extending your period with total UBTI < $1000. If you reinvest distributions from these MLPs you will almost certainly NEVER start having positive UBTI reported. If your UBTI from an MLP does get start to generate positive UBTI, you can simply sell it in the IRA with absolutely no tax consequences and purchase another MLP.
3) There are brokerages that file a 990-T when necessary for their clients AS A FREE SERVICE. Some posters have written that a brokerage can charge outrageous fees for filing 990-Ts; I am sure that is true. But some brokerages also charge enormous commissions, and some also charge an annual fee for giving you the privilege of having an account there. Why would you do business with such a brokerage when there are many others that are much less expensive. Specifically, the two brokerages that I have IRAs will both file 990-Ts as necessary as a free service for their clients: Schwab and Wells Fargo Advisors. Both will also keep track of your rollover negative UBTI from previous years and use them to offset positive UBTI as needed.
4) The total annual return results of close end funds (and related entities) investing exclusively in MLPs have been abysmal to date. The total annual return of almost all of them have lagged the price-only full sector index (the Alerian MLP index, ^AMZ), and I am not aware of a single MLP CEF has ever equaled the full sector total return Alerian MLP index, ^AMZX. AMZX is only reported by some reporting services, but is available for free on a daily and historic basis directly from Alerian.
Two reiterate 2 points I have made:
A) I am NOT saying that all MLPs are UBTI-friendly, just that there are many that are and it is easy to find them. Some MLPs generate a lot of UBTI, and others produce highly variable UBTI results year-to-year; these are NOT good candidates for owning in an IRA.
B) I am NOT saying that all brokerages have a clue about filing a 990-T, nor will all file them for free. However there are plenty that do know what they are doing, support MLP investing in IRAs, and will file a 990-T as needed for free.