Question on capital gains on Master Limited Partnership preferred stock in a tax advantaged account

[MLP_Banana]

Hello,

I know that capital gains on a Master Limited Partnership (MLP) in a Roth account may result in UBTI income.  In a Roth this can result in significant tax obligations if the UBTI amount is great than $1,000.

Does anyone know whether the same thing is true for capital gains from trading preferred stock of an MLP in a Roth?  I own some preferred stock of an MLP in my Roth, and it has appreciated significantly.  If I sell it, will the capital gain from selling preferred stock of an MLP perhaps be UBTI?

If anyone knows the answer I would appreciate it!

Regards

[tagteam]

I'll page @dmertz 

[TomD8]

Yes, it is possible for some of that capital gain to be treated as ordinary income and subject to UBIT. This web reference provides a detailed explanation of how this can happen: https://seekingalpha.com/article/4415148-your-ira-holds-mlp-beware-of-ubit

[MLP_Banana]

Hi,

Thanks for trying to answer the question and linking to the general article about how investing in an MLP in an IRA can have the UBTI issue.

However, my question is whether capital gains from trading in an MLP's preferred stock can result in UBTI (in a Roth).  The owners of the preferred stock are not owners of the partnership, they are lenders to the partnership.  Therefore, capital gains from trading in the preferred stock of an MLP may not be the same (in terms of taxes) as capital gains from trading  in the preferred stock of an MLP.

However, I'm not sure.

The article you referenced didn't discuss capital gains from trading in the preferred stock of an MLP.  Does anyone have any idea?

Regards

[Mike9241]

do you get a k-1 for those preferred shares? if no then there should be no UBIT since you are not allocated a portion of the partnership's income and expenses. if yes, which I believe is the case, then the UBIT will come not from the capital gain portion of the sale but from the same elements that create UBIT for non-preferred shares  - -ordinary income and expense recapture.

[MLP_Banana]

I've only held these preferred shares in 2023, so I don't know if they produce a K-1.

Do preferred share of master general partnerships generally produce K-1s?

[Mike9241]

do preferred shares produce a k-1? At least some.

for example, look at Energy Transfer on the Tax Package Support website - yes there are k-1's for their preferred shares. You can see if your MLP preferred shares are listed but Tax Package Support is not used by all MLPs.

https://www.taxpackagesupport.com/ 

Never owned MLP preferred shares so don't know much about them.  you can always try to contact stockholder services for the company or even ask the broker. 

[TomD8]

In any case, tax filing for UBIT earned within an IRA is the obligation of the IRA custodian, not the IRA owner.

[MLP_Banana]

Yes, I am aware that the responsibilty for determining the tax liability is with the broker.

However, if the capital gain from the sale is UBTI, then it may make sense to not sell the preferred stock and instead withdraw it from the Roth IRA when I am 59 1/2.  This allows the cost basis of the withdrawn preferred stock to be the value on the date of withdrawal, and avoids the UBTI in a Roth problem.

For many MLPs held in tax advantaged accounts it may make a lot more sense to withdraw them from those accounts into regular accounts rather than sell and pay the UBTI income tax penalty.