Unitholder What it Means Taxation Example

Unitholder: What it Means, Taxation, Example

What Is a Unitholder?

A unitholder is an investor who owns one or more units in an investment trust or master limited partnership (MLP). A unit is equivalent to a share or piece of interest. Unitholders have specific rights outlined in the trust declaration, which governs the trust’s actions.

The most common type of unit trust is an investment vehicle that pools funds from investors to purchase a portfolio of assets. These unit trusts invest in various asset classes such as stocks (large-cap, small-cap, domestic, international, etc.), bonds (investment grade, high-yield, emerging market, tax-free, etc.), real estate, and other securities.

Key Takeaways

– A unitholder is an investor who owns units in an investment trust or MLP.

– The most common type of unit trust pools funds from investors to purchase a portfolio of assets.

– Unitholders may have an interest in a tax-advantaged MLP.

– Income received by unitholders is taxed as pass-through income.

Understanding Unitholders

Unitholders have a spectrum of risk/reward choices when investing in unit trusts. They gain exposure to a pool of securities and can trade units at any time, although unit trusts are less liquid than exchange-traded funds (ETFs), and unit prices may not reflect the net asset value (NAV) per share.

Unitholders may also have an interest in MLPs, investment vehicles that offer tax advantages to general and limited partners. Most MLPs operate in the energy sector, where pipeline companies utilize the MLP structure to provide preferential tax treatment to partners and unitholders. The primary appeal for unitholders is the potential for high-income yields.

One distinction between unitholders and shareholders is that unitholders often have limited voting rights compared to corporate shareholders.

Unitholder Taxation

For unit trusts, unitholders pay income taxes on interest, dividends, and capital gains distributed to them if the units are held in a taxable account. The unit trusts provide all unitholders with IRS Form 1099, typically 1099-INT or 1099-DIV.

In the case of MLPs, each unitholder’s proportion of income, gains, deductions, losses, and credits is reported on a Schedule K-1. Positive net amounts are subject to pass-through taxation, regardless of whether a cash distribution was received. Net losses can be carried forward and used against future income, but only from the same MLP.

The Tax Cuts and Jobs Act, passed in 2017, introduced the qualified business income deduction, or 199A deduction, for pass-through businesses, including unit investment trusts. This deduction allows non-corporate taxpayers to deduct up to 20% of the qualified business income from each pass-through business they own.

Example of a Unitholder

Suppose an investor wants to be a unitholder in a real estate investment trust (REIT) and chooses to purchase shares in Prologis, Inc. (PLD), the largest real estate company in the world. The investor conducts due diligence and selects this investment due to the assets in the portfolio and its growth potential in the current market environment. All income received by the unitholder will be taxed as pass-through income.