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Master
Limited Partnerships (MLPS)
By Doug West
This little-known, rising-star asset class has
created quite a buzz lately. At least for those in-the-know
investors who have heard of them (*again, very few investors have).
You are ahead of the rush that will surely come toward MLPs by
reading this.
In this article we will cover some basics on Master Limited
Partnerships (*MLPs), and the tax planning issues involved.
Unlike corporations, MLPs pay no corporate-level tax. The
partnership company passes the majority of their income to
investors.
MLP investors are actually just what the name implies, partners in
the public company (*technically you are called a "Unit Holder"
or a Limited Partner). MLP ownership is measured in units (*not
shares as with
stocks). The quarterly income payments are called
distributions (*not dividends). Distributions are usually 80-90% tax free,
because as a partner you share the income and expense depreciation.
Because of this depreciation allowance, 80-90% of the income
payments you receive from a typical MLP is considered a return of
capital by the IRS. Which means you won't pay taxes immediately on
that 80-90% of the income. The other 10 or 20% will be taxed at your
normal earned-income rate.
This tax treatment actually can cause a few issues for investors.
MLPs are not normally recommended as investments for your IRA.
However, there are now a few ETFs that are primarily investing in
MLPs, and paying dividends out to investors. Since the ETF is a
normal corporation, it does pay taxes and issues 1099s and NOT K-1's
(*which is what you will get as an MLP unit holder).
Since MLPs allow investors to defer 80-90% of their personal income
tax liability for years, or possibly indefinitely, you probably want
to get the help of a competent CPA or tax advisor. In addition to
the tax deferred issue, you may be required to file state taxes in
the states where your MLP does business (*this may not affect you
at all unless you are a major player).
But don't let that scare you off. The tax hassle is well worth the
benefits! With many MLPs you can earn well over 10% on your money (*again
with 80-90% tax deferred) in quarterly distribution checks.
Where else can you get that kind of return? The unit price (*like
a rising stock) can add even more to your yield. I'm not a big
fan of the buy and hold strategy, but these are investments you may
want to hold many years for Rock-Solid income!
Your favorite tax software will walk you through the whole tax issue
fairly quickly. MLPs send K-1 tax forms around March 15 (*as do
LLCs), and the whole K-1 process was recently made clearer by
the IRS.
MLPs trade on the major exchanges just like any stock. They can be
purchased easily through your online discount broker at the same low
commissions you pay to buy any stock.
However, getting information on MLPs can be difficult. Currently
there is no official clearing house of information on these
little-known securities. You have to do your homework to find them.
Here are a couple ETFs you might look at that invest in MLPs:
JP MORGAN ALERIAN ETF (AMJ)
KYE is a Kayne Anderson fund that holds shares of KYN, an MLP.
Here are a couple of my current favorite MLPs:
Plains All American Pipeline LP (PAA)
Enterprise Products Partners LP (EPD)
Be sure to
subscribe to my Email Alerts here... as I will be sharing many
of my favorite MLP plays in upcoming articles.
About the Author
Doug West has worked in Financial Planning and Investment training
for over 20 years. Get his No-Cost Audio Report on how you can
Secure Your Retirement with Free-Online Tools:
Get your Free Report Here and discover Rock Solid income
strategies, including how you may be able to increase your
social security check by 50%.
Learn the art of simple Mini-Dow Trading.
Forget day trading stocks and learn how to trade the mini index!
 Clare
& Micah...
Micah & Clare.
(310) 593.1165
Answers@EasyDayTradeSystem.com
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Every effort has been made to accurately represent
our product and its potential. The testimonials and examples used
are exceptional results, and are not intended to represent or
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of the example trades are made with demo accounts while other
results are from live trading.
If hypothetical or simulated performance results
are used, these have certain inherent limitations. Unlike an actual
performance record, simulated results do not represent actual
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results may have been under- or over-compensated for impact. No
representation is being made that any account will or is likely to
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Each individual's success depends on his or her
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