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Speaking of Income. What about MLP's & Canadian Trusts?
Old 02-07-2012, 12:41 PM   #1
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Speaking of Income. What about MLP's & Canadian Trusts?

Don't any of you venture into MLP's and or Canadian Trusts for income? I know taxes can be a bit of a pain to do end of year. But some MLP's have been pretty steady. Also, utility stocks and funds can throw off a good income. Of course there can be strong price fluctuations and sometimes a roller coaster, but if that can be true of bond funds as well, and as long as you don't need to cash then in and can manage on your cash flow, why wouldn't you consider them?
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Old 02-07-2012, 01:52 PM   #2
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I have owned MLPs, both in a taxable account and in an IRA.

There have been some discussion recently on Seeking Alpha about having to pay tax even in an IRA on something called depreciation recapture, when an MLP is sold. Lots of disagreement on the issue, with strong points for and against.

At my age, and enjoying ER, the last thing I want is to be embroiled in a tussle with IRS on a complex issue. Just not worth the hassle, disruption and upheaval in life.

So, last week I sold off all MLPs from the IRAs, and will from now on buy them only in a taxable account, and accept the K-1 complexities at tax time.

Fortunately, TurboTax and H&R Block software can handle these forms, though there could still be problems with UBTI and ROC having to be tracked, etc.
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Partnerships (MLP)- not in IRA
Old 02-07-2012, 02:00 PM   #3
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Partnerships (MLP)- not in IRA

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Don't any of you venture into MLP's and or Canadian Trusts for income?
I like MLPs: EPD, KMI & CODI. I even got some for our IRAs util I read about Unrelated Business*Income Tax (UBIT). I had to trim our holdings to the $1000/year max, to avoid the IRS complications.

I enter the K-1 info into Taxact online and hope it all works out. Anything else? What am I missing?
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Old 02-07-2012, 02:10 PM   #4
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You might consider one of the MLP ETF products now available. You get yield and eliminate the tax issues associated with owning the MLP. More information is available online through Seeking Alpha.
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Old 02-07-2012, 02:12 PM   #5
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There are some mutual funds, ETFs and ETNs that focus on MLPs that are suitable for IRAs. I have two small positions in MLPs within my IRA and don't worry about $1000 limit on UBTI. I also have an MLP ETN in my IRA and am quite happy with it.
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Old 02-07-2012, 02:15 PM   #6
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MLPs are fine as long as you don't sell them, because all that tax free dividend income then becomes taxable as ordinary income. I have 15% of my portfolio in MLP CEFs. When the CEF is organized as a C- corp the yield is lower but gain is taxed at LTCG rates.
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Old 02-07-2012, 02:19 PM   #7
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Michael,

Where would one be able to find a list of MLP CEFs?

The lower yield would more than be acceptable to me, if it can avoid the K-1 and UBTI jungle.

C
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Old 02-07-2012, 02:26 PM   #8
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Coolius, I use cefconnect and the CEF section at Morningstar. CEFconnect shows 16 MLP CEFs, some of which are organized as RICs and others as C-Corp. Most use leverage to offset their high expense levels and c-corp taxes, this makes them risky. Everyone needs to do their own due diligence on these but they do fit some portfolio needs.
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Old 02-07-2012, 03:07 PM   #9
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Michael,

Leverage may not be that bad if it is used with caution, and the ratio does not go out of sight in the reach for yield.

TYY and JMF seem to be reasonable prospects, and I will be tracking them. I especially like the holdings of TYY, as I used to own a couple of the MLPs in that list before.

Since they are organized as C-corp, am I right to assume that all I'd get at tax time is a 1099-DIV, or 1099-INT?

If that's the case, holding it in an IRA or ROTH is not a problem, nor cause for concern about UBTI or section 1245.

C
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Old 02-07-2012, 04:00 PM   #10
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I don't understand all of the trepidation on K-1's. They just aren't that difficult to handle with TT. Each of the MLP's that I have have websites where you can get your k-1 online. In some cases they get them out sooner than my brokerage firm.

Michael is right that once you sell there is a bit of a tax hit but I keep mine for the yield they throw off and don't plan to sell anytime soon.
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Old 02-07-2012, 04:27 PM   #11
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K-1s seem so inefficient: a bunch of boxes with indecipherable codes for amounts like $-1 and $2 that need to be transferred into the 1040 filing. For at least one of the entries, Turbotax usually comes up with a question like "Do section 876-b(2) rules apply to the $2?" Answering accurately takes a bunch of research for some trivial dollar number. Maybe if I owned thousands of MLP shares it would seem worth the effort.

Fortunately this silliness goes away with MLPs inside IRAs, but then there's the UBTI concern. Since I don't own much in the way of MLPs, I doubt I'll bump into any of the arcane IRA MLP rules.

MLPs held by pass-through entities like trusts and S-Corps are a problem since some K-1s don't arrive in the mail til late February, or even early March, by which date those entities were supposed to have filed their own K-1s with the IRS.
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Old 02-07-2012, 05:46 PM   #12
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Quote:
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Michael,

Leverage may not be that bad if it is used with caution, and the ratio does not go out of sight in the reach for yield.

TYY and JMF seem to be reasonable prospects, and I will be tracking them. I especially like the holdings of TYY, as I used to own a couple of the MLPs in that list before.

Since they are organized as C-corp, am I right to assume that all I'd get at tax time is a 1099-DIV, or 1099-INT?

If that's the case, holding it in an IRA or ROTH is not a problem, nor cause for concern about UBTI or section 1245.

C
Lots of members and guests reading these posts. You are not concerned with the leverage, and that is fine, but others should be aware.

Kayne Anderson and Tortise Advisors are the major CEF options, but there are others, like the Nuveen fund JMF. Right, all you get is the 1099. See the fund fact sheets for more info.
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Old 02-07-2012, 05:49 PM   #13
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I don't understand all of the trepidation on K-1's. They just aren't that difficult to handle with TT. Each of the MLP's that I have have websites where you can get your k-1 online. In some cases they get them out sooner than my brokerage firm.

Michael is right that once you sell there is a bit of a tax hit but I keep mine for the yield they throw off and don't plan to sell anytime soon.
The problem with the K-1 statements is not trepidation but hassle. It's the PITA factor, and with some MLPs you need to file returns in multiple states as well. If you own the MLP in a taxable account when you sell it is probably not a bit of tax, most of what you received tax free (as ROC) is taxed at ordinary income rates. That is painful and catches many by surprise.
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taxed at ordinary income rates, ouch!
Old 02-07-2012, 07:10 PM   #14
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taxed at ordinary income rates, ouch!

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TIf you own the MLP in a taxable account when you sell it is probably not a bit of tax, most of what you received tax free (as ROC) is taxed at ordinary income rates. That is painful and catches many by surprise.
Thanks for reminding me, I should sell some MLPs now, before we get into higher tax rate. My SS this year and DW SS in 3 years.
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Old 02-07-2012, 08:37 PM   #15
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Don't any of you venture into MLP's...?
I've got a bunch of MLPs (about 14), in taxable account. Had some of them for several years. I use to have one in an IRA but after learning of the max UBTI of 1K issue, I sold it bought MLPs in a taxable account.

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I know taxes can be a bit of a pain to do end of year.
First time I did K-1s in turbotax it was quite a learning curve, time consuming but doable. Now that I've learned & kept the notes, it goes faster. For a lot of the 14 or so MLPs I have, you can down load the K-1s almost directly into turbotax. Then I only have to customize the manual entries.

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Don't any of you venture into ... Canadian Trusts for income?
I've got about 5% of my portfolio in CDN stocks. I just got off the phone with Scottrade about their taking 25% dividend tax out instead of 15% starting in Feb. All because they used my PO Box address instead of my physical address (which after some hunting they have on file) to the transfer agent to certify I'm a US citizen allowed by US-Canadian tax treaty to only have 15% tax withheld. So yes I also have canadian stocks.

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But some MLP's have been pretty steady.
The MLPs on average have gained 27% with an average yield of 8.2%. The Canadian stocks on average have gained 22% with an average yield of 8.7%

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Also, utility stocks and funds can throw off a good income.
I prefer MLPs because of the deferred tax on ROC

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Of course there can be strong price fluctuations and sometimes a roller coaster...
Yeh, I'm not too thrilled about the sometime 30% price drops followed by recoveries passing lifetime highs. I just sold one at a 55% loss. But I'm very much still ahead.
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