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Enterprise Products Partners L.P. Message Board

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  • phughyoung phughyoung Apr 12, 2012 10:55 AM Flag

    question for abter - general MLP purchase question

    Lisa: I have done exactly that.

    In the fall of 2010 I sold my entire MLP portfolio. During the next several months I systematically reacquired (with some edits) the entire portfolio using deep-ITM puts. As expected, I was assigned on all the shares except EVEP which consistently ran away from me. Of course, I make out OK on that, as you know.

    However, I claimed all the option income on 2011s return and kept my basis high on the MLPs deliberately. I didn't think the MLPs would factor in the put premium in calculating my basis. I still don't think that.

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    • "However, I claimed all the option income on 2011s return"

      Well that would defeat the purpose of my proposition. My understanding is that the premiums on exercised (assigned) puts is not taxed in the year they are sold or exercised, rather subtracted from the basis in the acquired investment. If you pay tax now on the put proceeds that would defeat the intent of avoiding tax on distributions in excess of basis later on.

      What I am thinking is if I intend to hold units for a long time (or forever) and I do this and do not pay tax on the puts premium now (because I am using it to reduce my basis), then I essentially increase the tax deferral of my MLP investment (assuming the MLP only knows about the strike/purchase price unadjusted for options premiums).

      P.S. Can you confirm whether the capital account on your K-1 reflected the strike price without factoring in put premiums as PSHONORE suggested. Like you, I doubt the MLP gets information about the put premium so I would expect it to reflect the strike price of the option.

    • Assuming you bought in 2011, it should not be hard to determine. Just look at your 2011 K1 and see if the K1 Capital Contributed (Box L) equals the "strike price" of the put. There are some differencs of opinion on what the brokers report to the MLP. One school of thought says they report the purchase date and the MLP uses the average price for that day. Others have a different opinion. Logicically I would not think the MLP would want units to have an inflated basis but I have no idea what they get. (And I have little expertise in Option trading for that matter)

      Think what would happen in this situation; if you sold a put and there was a sharp drop in price and you got exercised. Would you want your basis on the units you now own to reflect the strike price or the market value on the exercise date?

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