What about MLPs

[Texas Proud]

OK... I saw Cramer talking about the decline in price of pipeline MLPs... and then saw articles on the decline of O&G MLPs....

Both seem to be pointing out that these might be buying opportunities to get some great yields....


I do not know much about MLPs.... are they worth getting into? Are there tax issues that need to be looked at? Are they better to buy in an IRA?

Just want to get some info since some have really good yields...





https://finance.yahoo.com/video/cramer-handle-pain-buy-mlps-221500269.html

 

[2017ish]

Here is a quick introduction to this issue, including the Unrelated Business Income Tax concerns if your IRA has more than $1000 of attributed income in a year MLPs and Retirement Accounts

It can become a hassle if you fully stock an IRA with them. (We've had a few over the years, but never enough to deal with paying taxes from IRA money)

 

[brewer12345]

Giant tax hassle. tick with an ETF or CEF if you think they are cheap.

 

[Rustic23]

No real info here.

A neighbor told me his FA had recommended MLP's and he had purchased some. Said they were a great income stream and I should get some.

My reply: I don't have a clue what they are, how they work, or why they are such a good deal. I'll just stick with my index funds.

I am in the mode that I have enough to live comfortably for the rest of mine and DW's life. For me, it is the risk reward/how much work is it. Investing in something I don't understand, and taking time to understand it, for something that will not change my life style, just does not make since.

 

[Bir48die]

MLP's

Have had these for years with both IRA's and Taxable accounts. One of my advisors uses these for the 40% that aren't in equities. They took about a 10% slide in the last six months of last year. The main thing is to stay out of exploration and stick with storage or pipelines.

From a tax standpoint they're fine in IRA's. If you have them in Taxable accounts they will take you forever on your taxes. I spend maybe 6 hours inputting these in for tax purposes. Otherwise you need a CPA which will cost you tons. Outside of this year they have been very profitable. They will return to that in another year or so as gas prices rise.

They are decent as part of a diversified portfolio.

 

[aja8888]

Having been in the oil business for decades, I bought into a select few of these limited partnerships a while back and now I am only with one very successful midstream company. It's doubled in the last year or so and bought out the GP. I have this in my IRA (against what all the "experts" say). Schwab figures the tax (unrelated business taxable income) and the LP has never triggered the $1K max for paying. No big deal here, but I would not bet the house on the oil business yet.

And if you are going to by MLP's stick with midstream assets (pipelines, gas plants, etc) and stay away, very far away, of any that are holding their assets in oil production, gas production, timber land, beanie babies, antiques, old cars, etc.

 

[gerntz]

Have had these for years with both IRA's and Taxable accounts. One of my advisors uses these for the 40% that aren't in equities. They took about a 10% slide in the last six months of last year. The main thing is to stay out of exploration and stick with storage or pipelines.

From a tax standpoint they're fine in IRA's. If you have them in Taxable accounts they will take you forever on your taxes. I spend maybe 6 hours inputting these in for tax purposes. Otherwise you need a CPA which will cost you tons. Outside of this year they have been very profitable. They will return to that in another year or so as gas prices rise.

They are decent as part of a diversified portfolio.

WE have one. You get a complicated K-1 for tax returns. The first time is a pain, but subsequents have been the same & take about 10-15 minutes each for me. Yes, good income source.

 

[Rick_Head]

Generally speaking an MLP is just a way for the Master Partner to absorb the $ of the junior partner.
YMMV

 

[hesperus]

I inherited a significant amount of oil/gas pipeline MLP's back in 2011, and carry them in my taxable portfolio. These MLP's are all top tier midstream pipeline/storage companies: EPD, PAA, MWE, MMP, SEP, and the former KMP. They have been excellent investments over that time (even with the recent drop in oil, they are still up significantly), but they can also be difficult to understand from a tax perspective.

The good: They have very good yields, which can be well over 5-6%, and the tax structure allows them to kick off this income in tax advantaged ways. The midstream or pipeline MLP's are my preferred holdings, since they are somewhat insulated from the ups and downs of the oil/gas price. However, they are still investments that are intrinsically tied to commodity prices (oil/gas) and as we see now, they can drop as fast as they go up.

The Bad: When you sell or liquidate one of these partnerships, especially with large gains, they can create a huge tax hit. That's when you eventually feel it. Last year, Kinder Morgan (KMP) dissolved their partnerships and rolled these under the umbrella of their parent company, KMI. They exchanged corporate shares for partnership shares and triggered a taxable event, which created a major tax headache/pain at the end of the year for me. Kinder Morgan was up huge when they did this, and it was a real shock to total taxes due. Even with previous carry over losses I could apply to that sale, it still created a huge tax bite and was somewhat complicated to sort out. I needed my tax accountant to sort through the complexities and get it figured out to my best benefit.

I can say that from my experience, I still find them a very good, but sometimes complicated investment to understand from a tax perspective. They provide great yields, and if I were needing to shore up my energy sector holdings right now, I would certainly be looking at them to make up a portion of that sector. And as others have mentioned, stick with midstream MLP's. Just be sure you understand what you are buying into, as they are NOT your typical ETF holding.

 

[aja8888]

Generally speaking an MLP is just a way for the Master Partner to absorb the $ of the junior partner.
YMMV

Unless the GP gets absorbed by the LP's.

 

[gerntz]

The Bad: When you sell or liquidate one of these partnerships, especially with large gains, they can create a huge tax hit. .

A big gain is a negative? Seriously? You prefer losses?

 

[hesperus]

A big gain is a negative? Seriously? You prefer losses?

Oh come on, of course not. Do you even understand how MLP's operate? The point is that the tax on gains is not calculated like an ordinary ETF or mutual fund, it is compounded by the fact that the yield over time is distributed in a tax advantaged manner, which ultimately means your gains upon the eventual sale are going to be taxed particularly heavy. Go back, read my post again and then read this: The Tax Bill Comes Due on Kinder Morgan MLPs - WSJ
Sheesh, sometime I wonder if people just post these inane comments to get their post numbers up, or worse, they just don't understand what they're investing in

Basically because MLPs are partnerships and not corporations, they don't owe federal income tax. Instead, investors—who are technically members of the partnership—record a proportional share of the partnership's income, depreciation, losses and other items on their personal tax returns. The reason many investors owe little to no tax each year on MLP payouts is that most taxes are deferred until units are sold. There are tax effects that accumulate over time, however. An important one is that, unlike with dividends, MLP payouts reduce the investor's "cost basis," the starting point for measuring income tax after a sale. The lower the cost basis, the higher the taxable income.

 

[maloney50]

I had a large gain in kinder Morgan as well, basically it was a triple and paid a good dividend. However, once you sell there is a large tax bite. My tax bill was very large. For me, going forward I'm going to stick with regular index funds or stocks taxed at 15% on long term gains. Also, your accounting bills will be large when you sell unless you are a tax lawyer or accountant.


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[gerntz]

Oh come on, of course not. Do you even understand how MLP's operate? The point is that the tax on gains is not calculated like an ordinary ETF or mutual fund, it is compounded by the fact that the yield over time is distributed in a tax advantaged manner, which ultimately means your gains upon the eventual sale are going to be taxed particularly heavy. Go back, read my post again and then read this: The Tax Bill Comes Due on Kinder Morgan MLPs - WSJ
Sheesh, sometime I wonder if people just post these inane comments to get their post numbers up, or worse, they just don't understand what they're investing in

Basically because MLPs are partnerships and not corporations, they don't owe federal income tax. Instead, investors—who are technically members of the partnership—record a proportional share of the partnership's income, depreciation, losses and other items on their personal tax returns. The reason many investors owe little to no tax each year on MLP payouts is that most taxes are deferred until units are sold. There are tax effects that accumulate over time, however. An important one is that, unlike with dividends, MLP payouts reduce the investor's "cost basis," the starting point for measuring income tax after a sale. The lower the cost basis, the higher the taxable income.

If you understood how MLP's worked, you wouldn't be calling the taxes due on sale a huge hit instead of finally paying the piper for what was avoided for years. Why shouldn't one realize this will ultimately happen instead of crying woe to me when it does? As for the KMP thing, it's a separate issue that doesn't apply to typical MLP issues. No reason to bring it up. Silly commentary.

 

[hesperus]

If you understood how MLP's worked, you wouldn't be calling the taxes due on sale a huge hit instead of finally paying the piper for what was avoided for years. Why shouldn't one realize this will ultimately happen instead of crying woe to me when it does? As for the KMP thing, it's a separate issue that doesn't apply to typical MLP issues. No reason to bring it up. Silly commentary.

This isn't about liking or disliking investment gains (duh), and your response is indicative of how you are missing the point again The OP wanted to know if there are particular tax issues regarding investing in MLP's. The KMP example I gave is ABSOLUTELY typical of how the accounting procedures of MLP's can affect one's taxes at the time of sale. If you call a continually reducing cost basis over time a 'silly detail', you really don't understand what you are investing in.

 

[MichaelB]

Folks, we can disagree without being disagreeable.

 

[hesperus]

I had a large gain in kinder Morgan as well, basically it was a triple and paid a good dividend. However, once you sell there is a large tax bite. My tax bill was very large. For me, going forward I'm going to stick with regular index funds or stocks taxed at 15% on long term gains. Also, your accounting bills will be large when you sell unless you are a tax lawyer or accountant.


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+1
I have had to rely on my accountant when moving out of positions in MLP's. There is no doubt that the accounting procedures are more complicated with the sale of these. And in some years, I've had the K1's come in late and force me to file an extension.

 

[Bir48die]

I have no control over when my MLP's are sold. This past year my advisor sold a number of these plus took gains on many of my investments in my taxable account. The end result...an additional $10k tax bill. However, once my shock subsided I realized my gains allowed me to pay these.

I inherited a significant amount of oil/gas pipeline MLP's back in 2011, and carry them in my taxable portfolio. These MLP's are all top tier midstream pipeline/storage companies: EPD, PAA, MWE, MMP, SEP, and the former KMP. They have been excellent investments over that time (even with the recent drop in oil, they are still up significantly), but they can also be difficult to understand from a tax perspective.

The good: They have very good yields, which can be well over 5-6%, and the tax structure allows them to kick off this income in tax advantaged ways. The midstream or pipeline MLP's are my preferred holdings, since they are somewhat insulated from the ups and downs of the oil/gas price. However, they are still investments that are intrinsically tied to commodity prices (oil/gas) and as we see now, they can drop as fast as they go up.

The Bad: When you sell or liquidate one of these partnerships, especially with large gains, they can create a huge tax hit. That's when you eventually feel it. Last year, Kinder Morgan (KMP) dissolved their partnerships and rolled these under the umbrella of their parent company, KMI. They exchanged corporate shares for partnership shares and triggered a taxable event, which created a major tax headache/pain at the end of the year for me. Kinder Morgan was up huge when they did this, and it was a real shock to total taxes due. Even with previous carry over losses I could apply to that sale, it still created a huge tax bite and was somewhat complicated to sort out. I needed my tax accountant to sort through the complexities and get it figured out to my best benefit.

I can say that from my experience, I still find them a very good, but sometimes complicated investment to understand from a tax perspective. They provide great yields, and if I were needing to shore up my energy sector holdings right now, I would certainly be looking at them to make up a portion of that sector. And as others have mentioned, stick with midstream MLP's. Just be sure you understand what you are buying into, as they are NOT your typical ETF holding.

 

[Texas Proud]

+1
I have had to rely on my accountant when moving out of positions in MLP's. There is no doubt that the accounting procedures are more complicated with the sale of these. And in some years, I've had the K1's come in late and force me to file an extension.

That was one of the reasons that I was thinking about buying in a ROTH... no tax gains to worry about... but I did not know about potential tax issues otherwise...


Still do not know if I will take the plunge or look for an ETF and do it that way.... I got time on my side..

 

[Slow But Steady]

If I hold my MLPs forever, I'll never experience the big capital gains that would make me have to "pay the piper."

Instead, my basis, which is decreasing as the MLP pays out in the form of return of capital, will be stepped up for my heirs upon my eventual demise.

 

[maloney50]

Good point, if you want an investment that you have to keep till you die or else you face tax hell buy an MLP. Oh buy they way, Kinder Morgan dissolved their MLP structure because they believed the normal stock dividend structure would allow them to provide superior value to the shareholders. They went into great detail on this when they dissolved the MLP as to why a normal stock structure would allow them to provide superior value to the shareholder. That being said I have a big gain in EPD as well. When I sell this i'll be able to do my taxes on turbo tax, real easy.

 

[MRG]

If I hold my MLPs forever, I'll never experience the big capital gains that would make me have to "pay the piper."

Instead, my basis, which is decreasing as the MLP pays out in the form of return of capital, will be stepped up for my heirs upon my eventual demise.

That was my plan with KMP, didn't work so well.

 

[Slow But Steady]

That was my plan with KMP, didn't work so well.

There is that.

I seem to recall that there are also some bad consequences if your basis ever goes to zero. That's unlikely, though, if the partnership is making ongoing investments.

 

[haha]

There is that.

I seem to recall that there are also some bad consequences if your basis ever goes to zero. That's unlikely, though, if the partnership is making ongoing investments.

I think a successful partnership held long term would very likely go to zero if the you did not add to your holdings from time to time.

I have used royalty trusts on and off.for years. Here the rules require that every separate buy be accounted and depreciated separately. So you may get to zero basis on some of your units, while still having a positive basis on others. This is actually ok, as when cost depletion is over (ie. when a tranche has been depreciated to zero), you can use percentage depletion.

Ha

 

[Running_Man]

I hope to have the privilege of paying huge tax bills as time goes by, last thing I want is 10 billion dollars of untaxed equity when I die


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