The master limited partnership is a business form that operates as a hybrid of a limited partnership and corporation. It offers the tax advantages of a limited partnership along with the liquidity enjoyed by corporate shareholders. Selling shares in a master limited partnership is a taxable event.
Master Limited Partnership Structure
A master limited partnership, or MLP, differs from other partnerships because ownership is divided into shares that can be publicly traded through a broker. Unlike a corporation, however, an MLP is not considered an entity separate from its partners. MLP partners enjoy a form of limited liability: Although partners are not personally liable for MLP debts, MLP creditors can seize distributions already made to MLP partners if the debt in question arose before the distribution was made. MLPs are particularly common in industries such as natural resources, financial services and real estate.
General Taxation Structure
Like a general partnership, an MLP is a “pass-though” taxation entity, meaning the Internal Revenue Service doesn’t tax the MLP itself, only its partners. Thus the MLP avoids the double taxation that many corporations are subject to. Because MLPs are not subject to double taxation, that leaves the MLP with more money to distribute to its partners, thereby increasing the value of MLP shares. This allows them to be sold at higher prices.
Capital Gains Tax
When you sell an MLP share at a profit, the IRS treats the profit as income and taxes it accordingly. If you held your MLP share for a year or less before you sold it, your profit is considered a short-term capital gain. If you end up with a net short-term capital gain over all of your sales of investment property during the tax year, the IRS will tax the gain at ordinary income tax rates. If you held your share for more than a year before selling it, your profit will be considered a long-term capital gain. If you end up with a net long-term capital gain for the tax year, your gain will be taxed at lower long-term capital gains tax rates – 20 percent as of 2013.
Capital Loss Deduction
If you sell your MLP shares at a loss and you incur a net capital loss for the tax year, you can deduct up to $3,000 of your loss from your taxable income. If your capital loses exceed $3,000, you can carry forward your excess capital loss to the next tax year, subject to the same $3,000 limit. You can continue carrying losses forward indefinitely. The deduction limit is reduced to $1,500 if you are married and filing separately.
To report capital gains and losses from the sale of MLP shares, as well as other transactions involving capital gains and losses, you must complete from 8949 and Schedule D along with Form 1040. You must also report capital gains and losses on Form 1040.
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