This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The Tax Benefits and Disadvantages of Investing in MLP Funds

NEW YORK ( MainStreet) --The first open end mutual fund that invested in master limited partnerships (MLP) was launched on March 30, 2010, and their popularity have been on the rise ever since. The tax benefits of the limited partnership combined with the liquidity of public securities has served as the foundation for the appeal.

Inflows into MLP funds have grown from $580 million in 2010 to $2.5 billion in 2012, according to Morningstar.

ALSO SEE: Gastro-Lounge EVR Taps Into Bitcoin Craze

"Investors are interested in MLP funds because of their high yield," said Morningstar's Abby Woodham. "MLP companies are fairly sturdy, so you can expect 4 to 6% yield without the volatility of investing in oil futures. "They work well as a component of a fixed income portfolio for investors that are positive on energy production in the U.S."

Like a REIT, an MLP is a publicly traded partnership that owns and operates infrastructure mostly related to the production and processing of energy and natural resources.

The down side of MLP Funds is that they are structured as corporations in order to be primarily invested in master limited partnerships, which requires the fund to pay taxes at the corporate level.

"Because these funds are corporations, they must pay corporate taxes," Woodham said. "That tax liability is passed through to investors and can negatively impact return. On the upside, investors also share in the beneficial tax treatment of MLP distributions."

Another negative of investing in MLPs is filing a K-1 tax form instead of the usual 1099, which can be complicated. "If you buy MLPs in the wrapper of a mutual fund, you don't have to deal with a K-1 form and you still get tax deferred distributions," Woodham said.

ALSO SEE: How Extreme Savers Can Retire By 40

The upside that keeps investors coming back is that any depreciation on infrastructure assets is classified as return of capital and not immediately taxable.

"Taxes on any return of capital received by investors will be payable when they sell the fund, so there's a significant tax deferral feature in the yield," said Quinn Kiley, managing director and senior portfolio manager at FAMCO. "When a long-term investor in an MLP Fund sells their shares, they pay capital gains on the difference between the price of the fund shares at sale and the basis they have in those shares, which is adjusted for any return of capital they have received during their holding period."
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $93.24 -1.01%
FB $117.26 -0.68%
GOOG $701.43 0.82%
TSLA $212.10 -4.70%
YHOO $36.94 2.61%


Chart of I:DJI
DOW 17,660.71 +9.45 0.05%
S&P 500 2,050.63 -0.49 -0.02%
NASDAQ 4,717.0940 -8.5450 -0.18%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs