mlp's Master Limited Partnerships

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Wezzley77
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mlp's Master Limited Partnerships

Post by Wezzley77 » Fri Jan 12, 2018 9:16 pm

Does anyone here own any of these? i think i have watched every youtube video on these. They are very intriguing investments. I am well aware of the tax implications and the high volatility. Are these just a no no in the bogleheads community? Like some thoughts, expierences etc etc on these.

jbranx
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Re: mlp's Master Limited Partnerships

Post by jbranx » Fri Jan 12, 2018 9:37 pm

I have used them in my "play money" accounts for several years. The K-1's are nightmares sometimes, though TTax and other programs can handle the less complicated situations. Yields are high in those related to energy at the moment, but investment quality is highly varied. Some that were mainstays during the MLP bubbles of the past decade kind of imploded, Kinder Morgan being one case that now is differently structured. They pay out most of the business profits ,so have to continually raise capital.

Some are dependent on commodity pricing; others are closer to pure plays on toll road businesses that transport natural gas and oil. You might look at Spectra Energy Partners (SEP) and Enterprise Partners (EPD) as two high quality ones. I do my own research but also check the Morningstar reviews. They also like these two and Magellan Partners.

I would caution to be very well informed before being attracted to the high yields and tax advantages; there are pitfalls in capital allocation, taxes and tax law changes, state taxation, and no one should ever invest IRA type funds in MLPs because of tax complications. Because of the deferred tax liabilities, Fidelity, for one, restricts investments in MLP closed-end and open end funds. I haven't checked the returns of MLPs as an asset class in a while, but I'm guessing they have underperformed not only the broad market but sector funds like Vanguard Energy. The tax forms usually don't come out until mid March, so they cause delay in tax filing; in addition, CPA's will charge more to do taxes when K-1's are involved.

Maybe the best way to explain to a potential investor what MLPs are: Almost always, the retail investor is the "limited" partner; the general partner has all the control. That's why they have evolved from mainly the energy sector to things now like private equity firms like Blackstone and the Carlyle Group. Hedge fund types don't give up "two and twenty" to do an MLP structure because they are charitable.
Last edited by jbranx on Fri Jan 12, 2018 10:46 pm, edited 1 time in total.

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Rob5TCP
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Re: mlp's Master Limited Partnerships

Post by Rob5TCP » Fri Jan 12, 2018 9:42 pm

I debated for quite awhile on Kinder Morgan; one of the "hotter" MLP's.
Good cash flow; seemingly good prospects.
Ultimately it lost more then 60% of it's value.
I've avoided areas I don't have strong knowledge of. This is high on that list
of ones I avoid.

J295
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Re: mlp's Master Limited Partnerships

Post by J295 » Fri Jan 12, 2018 9:49 pm

Have owned a modest amount for years. Best to own these in taxable accounts.

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abuss368
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Re: mlp's Master Limited Partnerships

Post by abuss368 » Fri Jan 12, 2018 9:59 pm

Anyone ever look at the sample Form K-1 for Blackstone on their website. Nightmare would be a big understatement.
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MrPotatoHead
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Re: mlp's Master Limited Partnerships

Post by MrPotatoHead » Fri Jan 12, 2018 10:36 pm

K-1 = CPA Full Employment Act.

RudyS
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Re: mlp's Master Limited Partnerships

Post by RudyS » Fri Jan 12, 2018 10:42 pm

I had four of these many years ago (80's? 90's?). Real estate, films, oil. All lost money (except for the issuers). Luckily, not a lot of money involved. All were a big pain at tax time. There must be better investments out there. BTW, the person who sold me these, is now at Edward Jones!

runner3081
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Re: mlp's Master Limited Partnerships

Post by runner3081 » Fri Jan 12, 2018 11:13 pm

Had one in a "play money" account as well. Got tired of dealing with the K-1 and sold it in December to be done with it.

It was: UNL United Sts 12 Month Natural Gas Fund

There are some MLP's that don't have a K-1, if I remember correctly.

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CardinalRule
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Re: mlp's Master Limited Partnerships

Post by CardinalRule » Sat Jan 13, 2018 1:39 am

I own the ALPS Alerian MLP ETF (AMLP) in a retirement account (a small part of my portfolio).

AMLP tracks the Alerian MLP Infrastructure Index, consisting of 25 MLPs (I think) in the pipeline and processing space. AMLP sends me a 1099, which is of course easier to deal with than K-1s from individual MLPs. On the other hand, AMLP is a C-Corp and thus somewhat disadvantaged itself from an income tax perspective; that eats into returns on the ETF.

pshonore
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Re: mlp's Master Limited Partnerships

Post by pshonore » Sat Jan 13, 2018 8:57 am

Be aware of the tax pitfalls. Most MLPs generate losses on an annual basis with little if any taxable income. Any distributions received are therefore tax deferred as long as you basis exceeds $0. Those losses cannot be taken but carryover and can be used to offset operating income in future years for the same MLP. When you sell, a significant portion of your gain could be ordinary income due to recapture of depreciation and the balance will be Cap Gain/Loss. You do get to offset some of the ordinary gain with the carryover losses if you dispose of your entire interest in that MLP. There are a lot of moving parts. I've owned EPD since 2006 through thick and thin. Using XIRR, my avg annual return is around 15%. Many MLPs have returned significantly less and several E&Ps MLPs (drillers for O&G as opposed to processors and pipelines) have gone bellyup. The K1 will complicate your tax return although Turbo Tax usually handles it quite nicely. The new 20% Section 199a business deduction will likely be available for MLP owners (if there is a net profit)

danaht
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Re: mlp's Master Limited Partnerships

Post by danaht » Sat Jan 13, 2018 9:10 am

If you bought a MLP - you would probably regret it. It will really complicate your taxes since these are reported on a K1 - and are tricky to enter. And if you don't do your taxes yourself - your accountant will probably charge more money for the extra complication. Also, HR Tax Cut does not support MLPs - so you have to buy Turbo Tax Premiere going forward - if you do your taxes yourself. Your far better off buying a normal stock or ETF index fund that reports on a 1099.

pshonore
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Re: mlp's Master Limited Partnerships

Post by pshonore » Sat Jan 13, 2018 9:45 am

danaht wrote:
Sat Jan 13, 2018 9:10 am
If you bought a MLP - you would probably regret it. It will really complicate your taxes since these are reported on a K1 - and are tricky to enter. And if you don't do your taxes yourself - your accountant will probably charge more money for the extra complication. Also, HR Tax Cut does not support MLPs - so you have to buy Turbo Tax Premiere going forward - if you do your taxes yourself. Your far better off buying a normal stock or ETF index fund that reports on a 1099.
Agree about HRB software not working but TT Deluxe works perfectly well with MLPs (I've even used TT Basic)

Katietsu
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Re: mlp's Master Limited Partnerships

Post by Katietsu » Sat Jan 13, 2018 12:15 pm

pshonore wrote:
Sat Jan 13, 2018 9:45 am
danaht wrote:
Sat Jan 13, 2018 9:10 am
If you bought a MLP - you would probably regret it. It will really complicate your taxes since these are reported on a K1 - and are tricky to enter. And if you don't do your taxes yourself - your accountant will probably charge more money for the extra complication. Also, HR Tax Cut does not support MLPs - so you have to buy Turbo Tax Premiere going forward - if you do your taxes yourself. Your far better off buying a normal stock or ETF index fund that reports on a 1099.
Agree about HRB software not working but TT Deluxe works perfectly well with MLPs (I've even used TT Basic)
Even TT premiere can not always deal automatically (at least not correctly) with many of elections that need made and things that need tracked over the lifetime of ownership dependent on these elections. Quite frankly, I have always suspected a lot of tax returns with MLP’s are not optimized and maybe not accurate either. But the IRS has no simple way of identifying problems so errors are never identified.


Had a financial advisor put a friend into a popular oil MLP. Only a $7000 investment. Caused the cost of her tax return to go from $150 to $900. Yes, part of this was because she had to go to a more expensive preparer to find one that would do a MLP sell.

pshonore
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Re: mlp's Master Limited Partnerships

Post by pshonore » Sat Jan 13, 2018 1:22 pm

Katietsu wrote:
Sat Jan 13, 2018 12:15 pm
pshonore wrote:
Sat Jan 13, 2018 9:45 am
danaht wrote:
Sat Jan 13, 2018 9:10 am
If you bought a MLP - you would probably regret it. It will really complicate your taxes since these are reported on a K1 - and are tricky to enter. And if you don't do your taxes yourself - your accountant will probably charge more money for the extra complication. Also, HR Tax Cut does not support MLPs - so you have to buy Turbo Tax Premiere going forward - if you do your taxes yourself. Your far better off buying a normal stock or ETF index fund that reports on a 1099.
Agree about HRB software not working but TT Deluxe works perfectly well with MLPs (I've even used TT Basic)
Even TT premiere can not always deal automatically (at least not correctly) with many of elections that need made and things that need tracked over the lifetime of ownership dependent on these elections. Quite frankly, I have always suspected a lot of tax returns with MLP’s are not optimized and maybe not accurate either. But the IRS has no simple way of identifying problems so errors are never identified.


Had a financial advisor put a friend into a popular oil MLP. Only a $7000 investment. Caused the cost of her tax return to go from $150 to $900. Yes, part of this was because she had to go to a more expensive preparer to find one that would do a MLP sell.
Having done many MLP tax returns, I do not believe this is the case. I will agree it can be a problem to find a tax preparer who understands all the nuances of MLPs.

Valuethinker
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Re: mlp's Master Limited Partnerships

Post by Valuethinker » Sat Jan 13, 2018 3:40 pm

Wezzley77 wrote:
Fri Jan 12, 2018 9:16 pm
Does anyone here own any of these? i think i have watched every youtube video on these. They are very intriguing investments. I am well aware of the tax implications and the high volatility. Are these just a no no in the bogleheads community? Like some thoughts, expierences etc etc on these.
If you do a search you will find a lot of threads on MLP

Note that Richard Kinder, who really drove these things from the supply end, eventually gave up and collapsed his company back to an ordinary Corporation, I believe.

dbr
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Re: mlp's Master Limited Partnerships

Post by dbr » Sat Jan 13, 2018 4:23 pm

Valuethinker wrote:
Sat Jan 13, 2018 3:40 pm
Wezzley77 wrote:
Fri Jan 12, 2018 9:16 pm
Does anyone here own any of these? i think i have watched every youtube video on these. They are very intriguing investments. I am well aware of the tax implications and the high volatility. Are these just a no no in the bogleheads community? Like some thoughts, expierences etc etc on these.
If you do a search you will find a lot of threads on MLP

Note that Richard Kinder, who really drove these things from the supply end, eventually gave up and collapsed his company back to an ordinary Corporation, I believe.
By chance I owned some shares in one of those. When they went private I was bought out (involuntarily). As it was the price went up quite a bit at the time but there was also a significant capital gain to be taxed, whether one wanted it or not.

mortfree
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Re: mlp's Master Limited Partnerships

Post by mortfree » Sat Jan 13, 2018 4:32 pm

I owned EPD for a year and a half. After seeing the K-1 after the first tax year I decided I would sell it the following year.

That year I hired a professional to do my taxes for the first time ever.

My investment was small and having to pay someone to do my taxes just added to the pains (for me) YMMV.

Also I originally wanted to put EPD in my Roth account but Capital One Investing wouldn’t even allow me to do it. That should have been enough warning for me to avoid it.
Oh well.

danaht
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Re: mlp's Master Limited Partnerships

Post by danaht » Sun Jan 14, 2018 9:28 am

pshonore wrote:
Sat Jan 13, 2018 9:45 am
danaht wrote:
Sat Jan 13, 2018 9:10 am
If you bought a MLP - you would probably regret it. It will really complicate your taxes since these are reported on a K1 - and are tricky to enter. And if you don't do your taxes yourself - your accountant will probably charge more money for the extra complication. Also, HR Tax Cut does not support MLPs - so you have to buy Turbo Tax Premiere going forward - if you do your taxes yourself. Your far better off buying a normal stock or ETF index fund that reports on a 1099.
Agree about HRB software not working but TT Deluxe works perfectly well with MLPs (I've even used TT Basic)
You are definitely correct. But, I think the 2018 version of Turbo Tax only allows you to enter publicly traded partnership data via "form mode" - unless you have the Premier version (or higher).

pshonore
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Re: mlp's Master Limited Partnerships

Post by pshonore » Sun Jan 14, 2018 10:15 am

I'm skeptical the "Interview Mode" will handle all the nuances of a K1. Some of those entries say "see partner instructions" which would be really difficult to program.

J295
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Re: mlp's Master Limited Partnerships

Post by J295 » Sun Jan 14, 2018 10:23 am

We own EPD and K-1 has been a non-issue on turbo tax (we have Self-Employed version) and wasn't any extra work when we used an accountant.

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BolderBoy
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Re: mlp's Master Limited Partnerships

Post by BolderBoy » Sun Jan 14, 2018 12:03 pm

These were the last things I played with before throwing it all over and going with a BH, 3 Fund portfolio. Never regretted ditching MLPs and have never looked back.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

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onthecusp
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Re: mlp's Master Limited Partnerships

Post by onthecusp » Sun Jan 14, 2018 7:04 pm

Wezzley77 wrote:
Fri Jan 12, 2018 9:16 pm
Does anyone here own any of these? i think i have watched every youtube video on these. They are very intriguing investments. I am well aware of the tax implications and the high volatility. Are these just a no no in the bogleheads community? Like some thoughts, expierences etc etc on these.
Not so much a no no as problematic on many fronts. They do not promote simplicity. They are, with few exceptions, a bet on the energy sector which concentrates investments in a way that does not fit with the other common portfolio "tilts" like small cap or value. Over weighting a sector like energy implies selling later in a market timing move. Many individual MLPs are quite speculative and narrow investments in subsectors of energy, like drilling or midstream assets that are highly localized in one market.

I own an MLP as an employee and that goes against some very good advice to not invest in the company you work for so as to avoid a downturn affecting both employment and investments. Since I hope to retire soonish, my exposure is mostly on the investment side which is with one of the most stable conservative MLPs so I feel pretty good about it, but I'm buying bonds with most new money right now to offset some risk.

On the plus side, as a buy and hold investment in a taxable account, the frankly crazy tax implications mean that the generous distributions are paid tax deferred and added to your basis. So I plan to either sell after retirement but before taking Social Security, when my tax rate is low, or hold and pass the units on to heirs on a stepped up basis, with advice to sell them all right away.

pshonore
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Re: mlp's Master Limited Partnerships

Post by pshonore » Sun Jan 14, 2018 10:42 pm

onthecusp wrote:
Sun Jan 14, 2018 7:04 pm
Wezzley77 wrote:
Fri Jan 12, 2018 9:16 pm
Does anyone here own any of these? i think i have watched every youtube video on these. They are very intriguing investments. I am well aware of the tax implications and the high volatility. Are these just a no no in the bogleheads community? Like some thoughts, expierences etc etc on these.

On the plus side, as a buy and hold investment in a taxable account, the frankly crazy tax implications mean that the generous distributions are paid tax deferred and added to your basis. So I plan to either sell after retirement but before taking Social Security, when my tax rate is low, or hold and pass the units on to heirs on a stepped up basis, with advice to sell them all right away.
Distributions actually decrease your basis as do operating losses. Operating income increases your basis and is of course taxable income unless you have prior year loss carryovers to offset the income. You can verify those effects by looking the Partners Capital Account Analysis in Part II of the K1

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onthecusp
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Re: mlp's Master Limited Partnerships

Post by onthecusp » Mon Jan 15, 2018 12:37 pm

pshonore wrote:
Sun Jan 14, 2018 10:42 pm
onthecusp wrote:
Sun Jan 14, 2018 7:04 pm
Wezzley77 wrote:
Fri Jan 12, 2018 9:16 pm
Does anyone here own any of these? i think i have watched every youtube video on these. They are very intriguing investments. I am well aware of the tax implications and the high volatility. Are these just a no no in the bogleheads community? Like some thoughts, expierences etc etc on these.

On the plus side, as a buy and hold investment in a taxable account, the frankly crazy tax implications mean that the generous distributions are paid tax deferred and added to your basis. So I plan to either sell after retirement but before taking Social Security, when my tax rate is low, or hold and pass the units on to heirs on a stepped up basis, with advice to sell them all right away.
Distributions actually decrease your basis as do operating losses. Operating income increases your basis and is of course taxable income unless you have prior year loss carryovers to offset the income. You can verify those effects by looking the Partners Capital Account Analysis in Part II of the K1
My bad, you are exactly right.
My intended point was that the distributions (which are a return of capital) are effectively tax deferred, not taxed when you receive them, rather they are taxed (due to the lowered basis) when you sell, or never taxed if left to heirs.

I did not realize the effects of operating income, thanks for that. The MLP I own rarely shows significant operating income.

pshonore
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Re: mlp's Master Limited Partnerships

Post by pshonore » Mon Jan 15, 2018 4:08 pm

onthecusp wrote:
Mon Jan 15, 2018 12:37 pm

My intended point was that the distributions (which are a return of capital) are effectively tax deferred, not taxed when you receive them, rather they are taxed (due to the lowered basis) when you sell, or never taxed if left to heirs.

I did not realize the effects of operating income, thanks for that. The MLP I own rarely shows significant operating income.
Actually, distributions are not taxed as long as your basis exceeds $0. After several years ( 7 to 10), it not unusual for your basis to drop to $0 particularly if you are passed through large operating losses. Not reinvesting distributions can make this happen sooner. When you basis drops to $0, tax at cap gain rates is generally due on distributions. Of course you avoid that buying making additional investments in the same MLP. One more point - other items of income passed through (interest, dividends, CGs, etc) increase your basis. Probably not a bad to review your capital account on the K1 each year to see whre its headed

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onthecusp
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Re: mlp's Master Limited Partnerships

Post by onthecusp » Tue Jan 16, 2018 1:58 pm

Thanks for the warning, that makes sense and I will have to watch out for that. I've received my units as compensation on a vesting schedule and in a discounted purchase plan. Due to AA and concentration in one company I will probably lighten up a bunch before that hits, but I shall have a look at where I stand.

I can't imagine how most self directed investors buy individual MLPs with any nearly complete understanding of the tax issues, good and bad. It is too bad because a large chunk of the economy is effectively excluded from the three fund portfolio. I do my own taxes and have been studying the issues as they come up, but a different MLP could have a very different profile of distributions, operating income, state taxable income (in multiple states), UBTI, and probably other categories. It makes my head spin. I appreciate your expertise and precision on this topic.

Gnirk
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Re: mlp's Master Limited Partnerships

Post by Gnirk » Tue Jan 16, 2018 2:16 pm

Owned EEP once, never again will I own a Master Limited Partnership.

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