Master Limited Partnerships (MLPs) are becoming more and more popular investment options. When you sell your interest in an MLP, the tax reporting can be complicated based upon your unique individual situation. Over the course of your investment in the MLP, you will receive a Schedule K-1 each year reporting your portion of the income from the MLP. In addition to your share of the yearly income, you will most likely receive distributions from the MLP throughout the year. These distributions are generally considered "tax-free" at the time because they are a return of your basis or return of capital in the investment. Therefore overtime, as you receive "tax-free" distributions, you will adjust your basis in the investment accordingly. When you finally decide to sell your interest in the MLP, you will have a taxable gain on the sale. This taxable gain will be the difference between the sales price and your adjusted basis in the investment. Reporting this taxable gain at the time of sale can be confusing.
Of the taxable gain you must report, you may have both capital gain/loss and ordinary gain/loss. Generally, you should receive some supplemental information with your Schedule K-1 in the year of the sale indicating the portion of ordinary gain or loss and the portion of capital gain or loss. To enter this transaction into TaxAct®, you will make two separate entries: one for the portion of ordinary gain or loss and one for the portion of capital gain or loss.
To enter the ordinary gain or loss amount on Form 4797 Sales of Business Property:
To enter the capital gain or loss amount on Form 1099-B Proceeds From Broker and Barter Exchange Transactions to transfer to Form 8949 Sales and Other Dispositions of Capital Assets and Schedule D (Form 1040) Capital Gains and Losses accordingly:
If you received a Form 1099-B for this transaction, enter the information accordingly to the Form 1099-B received and any supplemental information from your Schedule K-1. Otherwise, enter the transaction information as if you received a Form 1099-B and be sure to select reporting category "C" or "F" to indicate this transaction was not reported on Form 1099-B.
Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.