I hold midstream MLPs in taxable accounts with no plan to sell — this is the year-by-year tax math behind why.
By Lucas Andersen — Last updated March 22, 2026
This analysis models a specific approach: buying midstream MLP units in a taxable brokerage account, collecting distributions for decades, adding to positions when basis erodes, and holding through inheritance for a stepped-up basis under IRC §1014. The strategy is built for investors in the 24%+ federal tax bracket, with a 10+ year holding horizon, holding in taxable accounts (not IRAs), tolerant of K-1 filing complexity, and with capital to periodically add to positions.
In the first five years of holding a midstream MLP, you collect over $11,900 in cash distributions on a $37,500 investment and pay approximately $700 in federal tax. Your effective tax rate on cash received: 5.9%. For comparison: the same cash received as qualified dividends would cost approximately $2,240 in federal tax. As ordinary income, approximately $4,270. The MLP structure delivered identical cash for $700.
Scenario: 1,000 units of EPD at $37.50/unit. Distribution: $2.20/unit growing 4%/year. ROC: 80%. Tax bracket: 32% + 3.8% NIIT. After §199A QBI deduction, effective rate on K-1 income: 29.4%.
Around year 15–16 in this EPD scenario, your original lot’s basis hits zero. Every distribution after that triggers immediate capital gain recognition under §731(a). Buying additional units creates fresh basis with its own independent deferral runway. Basis is tracked per lot, not per position. When you buy 200 units at $45 in Year 8, the new lot has $9,000 of fresh basis absorbing distributions tax-deferred while the old lot continues eroding independently.
After 20 years holding 1,000 units with 4% distribution growth, buying 200 additional units in Years 8 and 14, the total cash distributions collected are $80,926. Total federal tax paid: $7,560. Effective tax rate on cash received: 9.3%. If inherited under §1014: lifetime effective rate stays at 9.3% with $0 tax on the inherited position. If sold in Year 20: §751 recapture and capital gains push total lifetime tax to approximately $31,000 — an effective rate of approximately 24%.
Each year, depreciation deductions create §751 “hot asset” exposure. After 20 years, estimated §751 ordinary income is approximately $36,000–$60,000. If sold, that’s $10,600–$17,600 in additional federal tax at ordinary rates. The stepped-up basis at death eliminates it entirely. Your §751 amount is determined by the partnership via the Sales Schedule, not by adding up K-1 depreciation.
Key risks include MLP-to-C-corp conversion (Kinder Morgan 2014, ONEOK 2017, Targa 2018), forced disposition through merger, distribution cuts (ET cut 50% in 2020), phantom income during downturns, legislative risk to §1014, sector concentration in energy midstream, and the behavioral difficulty of holding through market panics. A 50% distribution cut slows basis erosion and slightly improves the effective tax rate — the real damage is to cash flow, not tax efficiency.
Under IRC §1014, the heir’s cost basis resets to fair market value at death. On a position with $6,670 adjusted basis and ~$104,500 FMV: all basis erosion eliminated, all §751 recapture eliminated, heir’s tax if they sell immediately: $0. In community property states (AZ, CA, ID, LA, NV, NM, TX, WA, WI), both halves of community property receive the step-up when the first spouse dies.
Direct MLPs produce the highest after-tax outcome under the hold-forever strategy — approximately $36,000 more net estate value over 20 years than AMLP and $17,000 more than a midstream equity ETF. The advantage comes from tax-deferred distributions via return of capital and the §1014 step-up eliminating §751 recapture at death. If you sell before Year 12–15, AMLP likely wins because you avoid §751 and filing costs entirely.
Seven criteria: (1) Distribution coverage ratio of 1.3x+, (2) Distribution growth trajectory, (3) Balance sheet leverage below 4x Debt/EBITDA, (4) Low conversion risk, (5) Basis erosion rate, (6) Survival probability through commodity downturns, (7) Capex cycle and debt trajectory under §752 liability allocation.