Compass Diversified Holdings (CODI) has 3 issues outstanding which I have been buying and selling on a short term trade basis. They are on my watch list.
The CODI-C 7.875% issue has dropped back nicely in the last week–from a high around $26.70 to around $25.57-now bouncing a bit higher-it went ex dividend for 49 cents and just kept right on dropping
This issue should once again trade up to the mid $26.50 area in the next 10 weeks–about 3-4% higher that the current price. At the right price I am a buyer (maybe somewhere below 25.70).
Note–for those that are K-1 sensitive this is a MLP with K-1 issuance.
I had CODI-B in an IRA last year which resulted in UBTI of $216 on 600 shares (units).
Appreciate the warning @leakywaders .
To my recollection, no filing or tax owed if total UBTI in IRA does not exceed $1,000.
Does anyone know if this is $1,000 for Married filing joint too or it gets doubled regardless of which of the couple’s SSN is attributed to the UBTI?
Found the answer – each IRA is responsible for the UBTI and file taxes if it exceeds $1,000.
This UBTI in IRA seems rather painful and I guess I would much prefer investing in non-UBTI payers or buy it in taxable accounts if you anyway do file forms with UBTI (eg. if invested in partnerships etc )
Or, you could time your buy/sell between ex-dividend dates and avoud UBTI too.
Nothing painful about it – unless you want to consider paying the tax painful. Your broker does all the work
I hold 8 or 9 issues that generate potential UBTI in my IRA including CODI and some MLPs. The last three years I have paid
$0
$0
$3 this year in UBTI
Fidelity has PWC do the return, sends me a copy and withdraws the tax due and sends it to the IRS while I can sit back and enjoy a nice Mojito
I assume Fidelity also provides the Mojito! 🙂
I am not a cpa, but my understanding is that the $1000 is per IRA account, as each separate IRA is a different ‘taxpayer’ with a different EIN employee identification number. So I have 4 different IRA accounts plus 1 Roth. I try to apportion my MLPs,LPs, LLCs, PTPs, and the associated preferred shares into 4 roughly equivalent amounts between the 4 IRA accounts. Obviously, I can’t mix the regular IRA account contents with the Roth. So depending on the share count, I might have half of my MPLX shares in 2 different IRA accounts. Yes it is a pain, but better than paying tax twice on the UBTI- you’ll pay tax again when the holdings are withdrawn from the IRA. I have tried to find a list with high UBTI stocks, and can’t find one. https://www.ubs.com/us/en/wealth-management/our-services/individual-services/planning/retire-planning/ira-rollover.html Has a great link to a pdf explaining UBTI.
The $1000 threshold is per IRA. The tax due is taken from the account that incurred the excess ubti. It is filed on form 990-T by your broker. It is not on your joint 1040.
Discount brokers use PWC to prepare the 990-T. They have been claiming ubti from recaptured depn if you sell an MLP in your IRA. This is controversial and, supposedly, full-service brokers are not treating sales that way.
So I no longer trade MLPs or other K-1 generators in my IRAs, which are at TDA. I am taking those securities still in IRAs out as part of my yearly RMDs. No ubti is generated that way.
Bottom line, is I’ve learned to keep it simple. I’ve held MLPs for over a decade in my taxable accounts and have never had a problem or been questioned about them on my tax returns. TurboTax handles K-1s with ease. Entry time for each is generally 5 minutes or less.
All this is probably more than you wanted to know. 😉 It’s a long, complicated subject, discussed ad nauseum thru the years over at IV’s MLP board.
JMO
Same here, no problem for me. My IRA in Schwab is taken care of by them. I just mail Schwab the K-1s and they handle it. In my Etrade that is not IRA I use HR Block for my taxes and it is simple to enter the data off the K-1 into the software. I don’t know why folks are so scared of K-1s unless it goes back when brokers didn’t handle them for clients
Thanks for the info, Camroc.
Interesting idea to withdraw MLP’s from an IRA as part of the RMDs. Is it correct that any UBTI earned on an MLP before withdrawal from the IRA is nonetheless counted for purposes of UBTI taxation for that year?
And related question: If there’s gain from the time of the purchase price in the IRA to the price of the MLP at the time of withdrawal, is that gain UBTI? Thanks.
May I suggest you go do some homework about what UBTI is (and isn’t)? it isn’t really too bad, once you look at what it is and what it does.
A simple overview is here https://www.investopedia.com/terms/u/ubti.asp
IRS description is here https://www.irs.gov/charities-non-profits/unrelated-business-income-tax
I am not giving you tax advice, but here are three basic ideas to kick off your research:
1. UBTI is unrelated Unrelated Business Taxable Income. It generally means income to a tax exempt entity from active source that is different from the entity’s tax exempt purpose. For example, if your local museum (set up as a tax exempt charity) also runs a restaurant, the income from the restaurant is probably UBTI to the museum company.
2. An IRA is treated as a tax exempt entity. If it earns income from activities other than its tax exempt purpose, it has UBTI and has to pay tax on it (if it is over $1000/year).
3. MLPs, partnerships, etc. (entities that issue K-1s) are “pass through” entities, meaning that (a) they don’t pay taxes directly, because (b) whatever taxable income they earn gets passed through to its owners who report it on their tax returns.
So, if an IRA receives investment income from a K-1 entity, that income isn’t taxed (because the IRA is tax exempt) . However, if the K-1 issuer earns income that is UBTI, it has to pass that income through to its owners and reports it on the K-1, and the owners may owe tax on the UBTI.
Thanks for the input Private.
Thanks, Private.
Actually, I am a lawyer who worked with IRC section 512 and related provisions in an earlier life. I understand the general scheme. But I noted in Camroc’s post above that PWC is treating recaptured depreciation on sale of a security as UBTI. So I thought that he may have some practical information that is not reflected in IRS rulings. But perhaps I should have worded my post differently to make clear that I am not a clueless newbie who won’t even learn the basics before asking a question.
CWS – I may be inserting myself where not needed or wanted, but I take the risk nonetheless.
I do not see Private’s comments in the light you do. He is doing something that I will often do myself, that being to expand an answer beyond the scope of the question. I do so because my intended audience is not just the obvious recipient but the broader audience, which includes many who are not so expert in the subject.
Look, for example, at many of my posts in Canadian discussion. Ask me a narrow question and I will give you a broad answer.
Personally, I hope you will stick around and pass along knowledge where you can. For a non lawyer I spend a lot of time digging through obscure IRC Code and Regs sections. Just ask me about the Throwback Rule.
Bob-in-DE,
Thanks for your comment. II is an excellent board and, while my tax knowledge is dated, I do plan to stick around.
CWS – my apologies. As Bob suggested, I was trying to go beyond the question asked, but I also misunderstood your question (and certainly your background).
I was looking for some info on tax treatment of MLP sales a few years ago (before 2017 bill) and I found some good stuff on MLP sales in an IRA on the https://www.investorvillage.com/ .
I am curious about what Camroc said about how PWC is treating sales. I haven’t seen that, but I don’t think I would have, given how I manage my accounts.
I keep most of my K-1 reporters (esp. ones that throw off significant UBTI) in taxable accounts.
I manage my IRA holdings to not have more than $1000/yr in UBTI per IRA. So, I just don’t send K-1 info to the broker. If UBTI is below $1K, no tax return required, so they don’t need it. Side benefit is that they have no data to muck around with when I sell an issue.
I like Camroc’s idea of taking units from K-1 issuers as in-kind distributions. I am too young to have RMDs on my own IRAs, but I have some inherited ones that I have to take RMDs from.
Yes, but the MLPs I own in IRAs have always thrown off significant negative UBTI so my only problem has been with sales. PWC uses the data on the sales schedule that comes with the K-1 and consider any ‘ordinary gain’–which is the depn recapture–to be UBTI. Any leftover LT gain or loss is ignored for 990-T purposes.