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 represents a share, or piece of interest, in these investment vehicles. Unitholders are afforded specific rights outlined in the trust declaration, which acts as the governing document for 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 a diverse range of asset classes including large-cap, small-cap, domestic, international stocks, investment-grade bonds, high-yield bonds, emerging market bonds, tax-free bonds, real estate, and other securities.
Key Takeaways
- A unitholder is an investor owning units in an investment trust or MLP.
- Unit trusts are investment vehicles pooling funds to purchase a diversified portfolio of assets.
- Unitholders in MLPs benefit from tax-advantaged investment structures.
- Income for unitholders is taxed as pass-through income.
Understanding Unitholders
Investors in unit trusts have a varied spectrum of risk/reward options. Unitholders gain exposure to a pool of securities and can trade units anytime, though unit trusts might be less liquid compared to, for example, exchange-traded funds (ETFs). Moreover, the price of a traded unit might not always match the net asset value (NAV) of the unit trust per share.
In addition to unit trusts, unitholders may have stakes in master limited partnerships (MLPs), which offer noteworthy tax advantages to general and limited partners. Most MLPs are concentrated in the energy sector, with pipeline companies favoring the MLP structure for its favorable tax treatment of cash flows. High-income yields are a major attraction for unitholders in MLPs.
A distinguishing factor between unitholders and corporate shareholders is that unitholders often have more restricted voting rights compared to corporate shareholders.
Unitholder Taxation
For unit trusts, unitholders owe income taxes on interest, dividends, and capital gains distributed to them if the units are held in a taxable account. Unit trusts provide IRS Form 1099, typically 1099-INT or 1099-DIV, to all unitholders.
In MLPs, each unitholder’s share of income, gains, deductions, losses, and credits is reported via a Schedule K-1. If the net amount is positive, the unitholder pays tax on a pass-through basis regardless of whether a cash distribution was received. If there’s a net loss, it can be carried forward to offset future income, but only from the same MLP.
The Tax Cuts and Jobs Act of 2017 introduced a significant tax deduction for pass-through businesses, including unit investment trusts. The Qualified Business Income (QBI) deduction, or 199A 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
Imagine an investor decides to become a unitholder in a real estate investment trust (REIT). After thorough research, they invest in Prologis, Inc. (PLD), the world’s largest real estate company, attracted by the portfolio’s assets and growth prospects. All income received by the unitholder will be taxed as pass-through income.
Explore the potential of being a unitholder and make informed investment decisions to diversify your portfolio and maximize your returns.
Related Terms: shareholders, exchange-traded fund, ETFs, net asset value, Schedule K-1, REIT.
References
- U.S. Securities and Exchange Commission. “Updated Investor Bulletin: Master Limited Partnerships – An Introduction”.
- United States Senate: Committee on Finance. “Written Statement of the National Association of Publicly Traded Partnerships submitted to the Senate Committee on Finance Tax Reform Working Group on Community Development & Infrastructure, April 15, 2015”, Pages 2-3.
- United States Senate: Committee on Finance. “Written Statement of the National Association of Publicly Traded Partnerships submitted to the Senate Committee on Finance Tax Reform Working Group on Community Development & Infrastructure, April 15, 2015”, Pages 3-4.
- Internal Revenue Service. “About Form 1099-DIV, Dividends and Distributions”.
- Internal Revenue Service. “About Form 1099-INT, Interest Income”.
- Energy Infrastructure Council. “Basic Tax Principles”.
- Internal Revenue Service. “Schedule K-1 (Form 1065)”.
- United States Senate: Committee on Finance. “Written Statement of the National Association of Publicly Traded Partnerships submitted to the Senate Committee on Finance Tax Reform Working Group on Community Development & Infrastructure, April 15, 2015”, Page 4.
- Internal Revenue Service. “Tax Cuts and Jobs Act, Provision 11011 Section 199A - Qualified Business Income Deduction FAQs”.
- Prologis, Inc. “About: History”.
