Taxation of Publicly Traded Partnership Investments

During the last tax filing season, we observed increasing popularity of investing in publicly traded partnerships.  The individual strategies varied from buy and hold to active trading.  Although these investments are easily bought and sold just like to shares in corporations, the record keeping and tax reporting is not nearly so simple, and the tax consequences of these investments are often misunderstood.

Much of the popularity of publicly traded partnerships is attributable to what are perceived as tax free distributions.  It is not until the partnership interest is sold that the investor realizes that the distributions are not tax free, but tax deferred and partially subject to ordinary income tax rates upon sale of the interest.  During this tax season, we had many conversations with clients who were shocked by the tax liabilities related to the sales of publicly traded partnership investments.

Tax reporting for sales of publicly traded partnerships is also more complex than reporting sales of shares in corporations.  For stock sales, the only reporting is of the date acquired and sold, and the purchase and selling prices, which are all reported on Schedule D and form 8949.  For sales of publicly traded partnerships, we must first perform an analysis of each sale to calculate the ordinary income and capital gain, and then report these gains on separate tax forms.  This process can be further complicated by multiple investments and dispositions of interests in the same partnerships, which requires more analysis and record keeping.

Many of our clients have been investing in publicly traded partnerships for years, holding the investments and selling when the time is right.  Others buy and sell like stocks.  This year, one client purchased and sold interests in 42 separate partnerships.  I don't understand this strategy.

Current estate tax laws provide that the basis of inherited property is the property's fair market value at date of death.  Because of this provision, a strategy to consider is to hold publicly traded partnership investments until death to obtain stepped up basis and avoid ordinary income recognition.

Please contact us if we can be of assistance.  Comments are welcomed.