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What are the tax consequences of owning a master limited partnership?

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Wiki User
2008-03-01 01:32:37

Assuming you mean owning a share in a master limited partnership

(MLP)as an investor, he short answer is: you get tax-deferred

income on a quarterly basis, and pay income tax on your share of

partnership income, which is usually far smaller than the

distribution. The long anwer: the important thing about an MLP, or

any partnership, is pass-through taxation. That is, an MLP does not

pay an entity level tax the way a corporation does. Rather, the

partners--that is you and the other unitholders--are allocated

their proportionate shares of all tax items, net them out, and pay

the tax on the resulting taxable income. So, you will be allocated

a share of the partnership's income, its depreciation deductions,

etc. All this is on paper--you don't actually receive an amount

equal to your share of income. You do, however, receive a quarterly

distribution, which is like a dividend, except that it is treated

differently for tax purposes. Because the partnership doesn't pay a

tax, it can pay out more of its income to you in case than a

corporation typically can. Instead of being taxed currently, the

distribution is subtracted from your basis in your partnership

units. When you sell your units, your taxable gain is the

difference between your sales price and your adjusted basis, so the

tax on the distributions is collected then. While the distributions

lower your basis, your share of taxable income and other things

increase it, and so it takes longer than you might think to get

your basis to zero. If you ever do get to zero, the distributions

would become taxable. For more information, visit the website of

the MLPs' trade association, the National Association of Publicly

Traded Partnerships (http://www.naptp.org)...the answer is being

submitted by its executive director.


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