What Is a Unitholder?
Let me explain what a unitholder is: you're an investor who owns one or more units in an investment trust or master limited partnership (MLP). Think of a unit as equivalent to a share or a piece of interest in that entity. As a unitholder, you get specific rights outlined in the trust declaration, which governs how the trust operates.
The Most Common Type of Unit Trust
The most common type you'll encounter is an investment vehicle that pools funds from investors like you to purchase a portfolio of assets. These unit trusts invest in various asset classes, including stocks (large-cap, small-cap, domestic, international, and so on), 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 master limited partnership (MLP).
- The most common type of unit trust is an investment vehicle that pools funds from investors to purchase a portfolio of assets.
- Unitholders may also have an interest in a master limited partnership (MLP), a tax-advantaged investment vehicle.
- Income that unitholders receive is taxed as pass-through income.
Understanding Unitholders
You have a whole spectrum of risk and reward choices as an investor in these unit trusts. As a unitholder, you gain exposure to a pool of securities and can trade units at any time, but remember that a unit trust is typically less liquid than an exchange-traded fund (ETF), and the price of the traded unit might not match the net asset value (NAV) of the unit trust per share.
You might also hold an interest in a master limited partnership (MLP), which is an investment vehicle offering significant tax advantages to both general and limited partners. Most MLPs operate in the energy sector—for instance, pipeline companies use the MLP structure to provide preferential tax treatment of cash flows to partners and unitholders like you. What draws you in primarily is the potential for high-income yields from MLPs.
One key difference between unitholders and shareholders is that while you may have some voting rights as a unitholder, those rights are often much more limited than those of corporate shareholders.
Unitholder Taxation
For unit trusts, if you hold units in a taxable account, you pay income taxes on interest, dividends, and capital gains distributed to you. The unit trusts will send you an IRS Form 1099, usually 1099-INT or 1099-DIV.
In the case of master limited partnerships (MLPs), your proportion of income, gains, deductions, losses, and credits gets reported on a Schedule K-1. If the net amount is positive, you pay tax on a pass-through basis, regardless of whether you actually received a cash distribution; if there's a net loss, you can carry it forward and use it against future income, but only from the same MLP.
The Tax Cuts and Jobs Act from 2017 introduced a new tax deduction for pass-through businesses, including unit investment trusts. This qualified business income deduction, or 199A deduction, lets non-corporate taxpayers like you deduct up to 20% of the qualified business income from each pass-through business you own.
Example of a Unitholder
Suppose you're interested in becoming a unitholder in a real estate investment trust (REIT). You do your due diligence and decide to purchase shares in Prologis, Inc. (PLD), the largest real estate company in the world, because you like the assets in the portfolio and its potential for growth in the current market. All income you receive as a unitholder will be taxed as pass-through income.
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