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MLPs and Grantor Trust in your IRA and UBTI


BG2008
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From my understanding you are going to pay tax on any income the MLP generates (as this is considered UBTI) over $1,000 per year at your current regular income rate.  If you can buy an amount to stay under the $1,000 per year exemption you should be OK.  You may want to confirm with a tax accountant though as I have only had one LP in an IRA and the income was below the $1,000 exemption.

 

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I understand that distributions that you received is actually netted against depreciation charges.  Sometimes the distribution maybe larger than the depreciation and expenses,etc.  Is the gain from the differential between the dep/exp versus the distribution and/or from your purchase price and final sale price?  Any idea how this is calculated?

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My understanding is this benefit is primarily tax-paying entities (your distribution is partially tax shielded by the amount of the depreciation) however upon sale the tax benefit is recaptured.  So it is more of a tax deferral than a reduction in taxes paid.

 

In terms of calculation, the entity provides you with a calculation of the depreciation and the distribution.  Where it gets more tricky is on a state level as you are a partial owner of a business in each state the MLP does business in and you have to file in each state so the admin headache can be severe if you have a small position.

 

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I've never had a problem with a MLP in an IRA, but then I've always had plenty of depreciation left in my holdings.  If my holdings were 10 years old, my depreciation would be less and then I might not have seen it as such a good idea. Currently, I have no MLPs as I keep on thinking interest rates will go back up someday... For me, an MLP in an IRA is easier to deal with than dealing with multiple state income tax filings. YMMV.

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NoCalledStrikes,

 

Do you have to file or separately pay income taxes in your IRA due to your MLP holdings?  How do you know how much depreciation is left?  How do you adjust for what your purchase and exit prices are?  I understand that it is your custodian who has to file a tax return and most of the time they don't know what to do any way. 

 

Why do you own MLPs to begin with?  For income?  Just trying to understand who are the natural owner base for MLPs. 

 

 

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BG -  I never owned a position in my IRA that generated over $1000 in UBIT so I didn't ever encounter the issue of crossing this threshold , but I probably never had more than $100K in MLPs in my account at one time.    I never did anything with the K-1's because I never crossed the $1000 threshold.  Additionally, if you do cross the threshold, it is the custodian of the account that is responsible for paying the taxes to the IRS on an IRA, of course the custodian will charge you the tax paid and a fee for filing it.

 

I bought my MLPs for capital gains with a plan on holding them for no more than a couple years, but then as I mentioned previously I never expected interest rates to stay this low this long..

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  • 11 months later...

BG -  I never owned a position in my IRA that generated over $1000 in UBIT so I didn't ever encounter the issue of crossing this threshold , but I probably never had more than $100K in MLPs in my account at one time.    I never did anything with the K-1's because I never crossed the $1000 threshold.  Additionally, if you do cross the threshold, it is the custodian of the account that is responsible for paying the taxes to the IRS on an IRA, of course the custodian will charge you the tax paid and a fee for filing it.

 

I bought my MLPs for capital gains with a plan on holding them for no more than a couple years, but then as I mentioned previously I never expected interest rates to stay this low this long..

 

NOCalledStrikes,

 

Is there a back of the Envelope way to calculate what the UBIT would be?  For example, can you look at the distribution or a previous K-1 and determine that? 

 

Thanks.

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