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  • ross.john51 ross.john51 Nov 1, 2010 6:01 PM Flag

    Liza & Geotype - Need tax info on sell of MLP

    Liza and Geotype,

    I know that you two keep up with the financial aspects of owning MLP units more than any of the other posters.

    I read somewhere (I think it was Morningstar) that if and when a person sells their units in a MLP that their gains are not considered cap gains and taxed as such, but would be taxed as ordinary income instead. So does this mean that if with my pension, I fell into a 28% tax bracket, I would pay 28% of my gains in taxes?

    I am not planning to sell, but I do want to give some guidance to my beneficiaries.


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    • Unfortunately it's not possible to make an estimation of that sort. You will owe partly ordinary income and partly capital gains, but the ratio is not known till the K-1 arrives.

      When you sell MLP units, the K-1 for that year will indicate how much ordinary income is due and also provides you the numbers to adjust your basis so that you can determine your capital gains owed. Basically, your gains will be taxed partly as CG, partly as ordinary income (the ordinary income part is related to the tax deferred portion of your distributions over the years). However it is impossible to estimate the numbers in advance. You need to wait for the K-1 after sale to determine how much CG and how much ordinary income you owe.

      "I am not planning to sell, but I do want to give some guidance to my beneficiaries."

      Here is the great part though, if you are not planning to sell. If you die, your heirs get a step up in basis and that step-up essentially eliminates all the deferred tax. If you hold to death and your heirs later sell, all that deferred tax on the distributions up till the time of the holder's death does not have to be paid.

      One point I am not clear on though...the K-1 comes from the MLP itself (not from the broker). So who notifies the MLP that you died? To be sure, your heirs should probably notify the MLP and make sure the K-1 reflects that.