Most of an MLP’s cash distribution is typically return of capital, not immediately taxable income — which defers tax now but steadily reduces cost basis, setting up a larger gain later.
How it works
The return-of-capital share of the distribution reduces cost basis dollar for dollar. Once basis reaches zero, any further return-of-capital distributions become taxable capital gain instead of a basis reduction.
What this does not include
This doesn’t model the “recapture” of prior depreciation deductions as ordinary income (rather than capital gain) that can apply when MLP units are eventually sold — a real, often underestimated tax cost specific to MLP investing.
How to use this calculator
- Enter current cost basis, the annual distribution, and its return-of-capital percentage.
Frequently asked questions
Why is most of an MLP distribution return of capital?
Because MLPs pass through significant depreciation and other deductions from the underlying business (often pipelines or energy infrastructure), which shelters much of the cash distribution from immediate taxation.
What happens when cost basis reaches zero?
Further return-of-capital distributions become taxable as capital gain immediately, since there’s no more basis left to reduce.
Should I hold MLPs in a tax-advantaged account?
Often not ideal — MLPs can generate unrelated business taxable income (UBTI) inside an IRA, which can trigger unexpected tax within an account otherwise meant to be tax-advantaged.
