Not correct. If you bought and sold within a couple of days and never held over a month end, that might be the case. But if you hold more than a few days or hold across month end you will be allocated income/UBTI.
UBTI is generally the operating income of an MLP - usually from pumping and selling oil & gas, or transporting it through pipes, or gathering and processing gas, processing NGLs, etc. Most but not all MLPs have enough depreciation to offset that income. If you owned an NG "fund" (like UNG), they have no operations so there is no income to pass through and no UBTI; all they do is trade futures and most of the profit or loss winds up in Box 11 of the K1 and that whats goes on your tax return in addition to cap gains/losses. The thought that "20%" of the distributions were taxed is a misnomer. Distribution are never taxed (as long as your basis exceeds zero)
Operating income and other pass throughs (Royalties, Section 1231 gain, dividends, interest, etc ARE taxed
That's what I worry about. That may not happen until you have sold all of your holding, so keeping one share.... Still working on that.
Royalty payments for oil and/or gas paid to the MLP would be taxable to you outside of an IRA, but do not generate UBTI. I don't know if there are other similar things, but I know that is the case with an oil/gas royalty.
I checked K1 and if you bought and sold have no distributions, it is shown as capital contributed and withdrawn, there is no income of any sort, ordinary business, div, interest or UBTI so no, that isn't right. You deal with cap gains or loss but no other income.
One more comment, selling an MLP if I remember correctly converts all of those tax deferred distributions to ordinary income upon a sale, so that approach won't work. I'm not an accountant and I haven't sold an MLP in 10 years but I think I'm right on that one.
RF, I just pasted the last four paragraphs from some tax info group, not my thoughts. Your are right, just looked at a Schwab document, they file but pay the tax from the IRA, seems that triggers a distribution. You pay the tax and more tax on the dist. And if I read it correctly, Schwab puts the onus of letting them know the UBTI on the individual, otherwise how would they know your total UBTI, the don't get the k1.
If an MLP has no UBTI, then it has no taxable ordinary income, so it wouldn't be taxable outside the IRA, dividends and interest would but they are usually small amounts. Otherwise, can't see an advantage for holding the MLP in an IRA except for no need to deal with a K1 but the UBTI issue nullifies that advantage.
I didn't have problems with my EPD last year, the K1 was straightforward, but I didn't the other MLPs they controlled.
As for your third point, that advice doesn't seem reasonable. Not sure it is entirely legal, seems you or the custodian would have to file the 990, don't know about who pays the tax, the IRA or individual, Schwab says it comes out of the IRA. Can see that they would want the IRA to pay it, otherwise it would comparable to making additional contributions to an IRA.
I still think my idea of buying and selling before and after the ex div date each quarter would convert the distribution from ordinary income to capital gains and eliminate the UBTI problem. Seems someone has already thought of this.
For most, probably buying one of the MLP funds is a better alternative. I was just trying to find a way to invest funds in an MLP and avoiding the UBTI.
"My strategy would be to never receive a distribution."
arb already correctly told you that this would not prevent you getting UBTI. The UBTI is nothing to do with your distribution and is not only allocated on ex-div day.
So doing this would give you the worst of both worlds. You would still be allocated UBTI yet you would get no distribution.
Harehow, you say "It is not illegal to own an MLP through an IRA. The ownership, however, triggers the UBTI rules and the requirement to possibly file a version of Form 990 and pay estimated taxes."
I believe that any forms to be filed to pay UBTI tax are done by the custodian, and your IRA gets to pay for it.
You say " There is no tax advantage to owning MLPs through an IRA."
That is false in many cases. In the simplest case, some MLPs have no UBTI. That blanket statement is not true, just it would be wrong to say there is always a tax advantage. EPD is one of the most complex to fill in your K-1s, or at least it was for 2010. It had holding in various other LPs. There was a lot of discussion last year discussing how to handle this. In an IRA with less than 1000 of UBTI, you would miss out on the paperwork.
You say "Some tax advisors recommend taking the easier and cheaper route of reporting any IRA-owned pass through items on the individual tax return instead of filing a separate Form 990 for the IRA."
I suspect you will not find such an adviser. Maybe I am wrong, but I sure will be surprised.
I still feel confused by a lot of this stuff. I have MLPs in IRAs. I have not been bit with UBTI tax yet. I do fear getting bit in the future. I intend to sell things that are generating significant UBTI in an IRA.
ARB, I'm still confused. If I look at my k1 for EPD, last year, the ordinary business income is about 25% of the distribution. And the UBTI amount is the same as ordinary income, so it excludes div, int...which is ok in an IRA. I think it is only ordinary bus income. If an MLP doesn't have income, no problem, until it is sold and the distributions above ord income are reclassified. Seems it would be a dangerous path to go down, a 990 and estimated taxes.
My strategy would be to never receive a distribution, sell before the ex div date and buy back the next day. I did trade a nat gas fund last year on a short term basis, never got income allocated, and the k1 showed capital allocated and withdrawn were the same number. I handled the cap gain/loss on Sched D. Seems this would be a way to capture the appreciation of an MLP without running into the problem of UBTI. As I said before, I run the risk that I lose some of the distribution, the MLP is usually marked down at the beginning of trading on ex div day. Not sure how one would do, over time you might not lose much of the dist, you could conceivably gain or just breakeven, if you believed in an efficient market. But if you thought an MLP might double over a couple of year period, the strategy might work, with no UBTI. I don't post on IV.
When an IRA owns an interest in a pass-through business entity (partnership or limited liability company), the IRA's share of the entity's income is UBTI. Pass-through entities generally do not pay federal income taxes. Instead, their income and expenses are passed through to their owners' income tax returns.
This rule most often trips up individuals who invest in master limited partnerships (MLPs) or real estate partnerships in their IRAs. MLPs are traded on major stock exchanges, and many people think of them as being the same as corporate stock. In fact, these are partnership units, and the income and expenses of the partnerships pass through to the owners at tax time. Individuals generally are urged not to purchase MLPs through IRAs.
It is not illegal to own an MLP through an IRA. The ownership, however, triggers the UBTI rules and the requirement to possibly file a version of Form 990 and pay estimated taxes. There is no tax advantage to owning MLPs through an IRA. Some tax advisors recommend taking the easier and cheaper route of reporting any IRA-owned pass through items on the individual tax return instead of filing a separate Form 990 for the IRA.
An IRA also has UBTI when debt is used to finance investments. Any type of income can become UBTI when debt is used to finance the property that generates the income. For example, if an IRA receives a margin loan from the custodian or broker, income generated by the securities purchased with the loan proceeds would be UBTI. Real estate mortgages also are debts that convert exempt income into UBTI. An IRA can own real estate and earn rental income, and that rental income will be tax deferred. If the real estate is financed with a mortgage, however, the rental income becomes UBTI.