When an MLP investor dies, their heirs receive a stepped-up cost basis to fair market value. Every dollar of basis erosion — gone. Every dollar of §751 recapture exposure — eliminated. This single provision (IRC §1014) is why sophisticated MLP investors hold positions for 30, 50, even 75 years.
By Lucas Andersen — Last updated March 6, 2026
At death, the heir’s cost basis resets to fair market value on the date of death (or alternate valuation date if elected). ALL cumulative basis erosion from distributions is wiped out. The heir starts fresh — as if they purchased at market price. This applies to all partnership interests including PTPs/MLPs.
Basis erosion: Decedent’s basis was $3,000 on units worth $30,000 → heir’s basis: $30,000. The $27,000 gap vanishes. §751 recapture: Accumulated depreciation recapture that would have been ordinary income → gone. §731 zero-basis gain: Heir’s basis resets to FMV, distributions are tax-deferred again.
Suspended losses do NOT transfer to heirs. They are deductible on the decedent’s final return, but only the excess over the step-up amount. In practice, the step-up usually exceeds suspended losses, so the deduction is small or zero. The step-up is worth far more than the lost suspended losses.
If the partnership has a §754 election (most large MLPs do), the partnership adjusts its inside basis to match the heir’s stepped-up outside basis. This ensures future K-1s reflect the new basis.
Generation 1: Buys 1,000 EPD at $26 ($26,000) at age 45. Over 30 years: collects ~$63,000 in tax-deferred distributions. Basis erodes to ~$2,000. At death (age 75, EPD at $40): heir inherits with $40,000 stepped-up basis. $24,000 basis erosion gain and $18,000 §751 exposure eliminated. Generation 2: Starts fresh at $40,000 basis. Collects another ~$63,000 over 30 years. Total across two generations: ~$126,000 from $26,000, with minimal taxes paid.
Tax law can change (§1014 has been politically targeted). MLPs can convert to C-corps. Distribution cuts are possible. Sector concentration in energy. Liquidity constraints for smaller MLPs.
In community property states (AZ, CA, ID, LA, NV, NM, TX, WA, WI), when one spouse dies, BOTH halves of community property receive a stepped-up basis — not just the decedent’s half. This doubles the step-up benefit for married MLP investors.