If you exceed $1000 of UBTI in an IRA, you owe tax. Most novice investors confuse UBTI for distributions, but the facts are that they are not one in the same. I've seen a lot of novices regurgitate stuff they read on internet message boards (like this one) and pretend to be experts, when 20-3 minutes of reading the FACTS will leave most investors with enough info to be informed.Many of the respectable brokerage firms have put together some excellenet Primers on MLPs. Of course, no substitute for going directly to the source and reading the IRS code.
Nearly all MLPs generate negative UBTI (unrelated business taxable income). You can carry the losses forward and use them to offset any potential positive UBTI from that respective MLP.The FACTS are that if you do indeed owe taxes based on exceeding $1000 of UBTI income, you print out the form provided by the IRS for such occasions and you pay the tax. Technically, it is the responsibility of the Account Custodian (not the owner, but the firm that manages the IRA, even if it is passive management to track/report, though more often than not, this doesn't happen). It is pretty simple though, UBTI is spelled out on the K-1.
Yes, you also lose the tax advantages of tax deferment, but MLPs have offered such attractive returns both in terms of capital appreciation and distributions (income) that many investors, whom often times have a significant amount of money in their IRAs vs in after tax accounts opt to simply buy MLPs in the IRA, and when they make withdrawals, they pay the tax. For those that are long time holders, most have not complained about the market beating returns and strong distribution growth.