Investors looking to avoid tax increases associated with the "fiscal cliff" negotiations are turning to the often-misunderstood world of master limited partnerships.
A sharp selloff earlier in the month of MLPs has boosted the curiosity of bargain hunters who believe that negotiations in Washington will not result in the partnerships losing their preferred tax status.
The fiscal cliff involves a series of tax increases and spending cuts that will take effect automatically if Congress fails to hit deficit-reduction targets. Economists fear going over the cliff will tip the country back into recession due to the austerity measures involved.
As long as they comply with regulations, MLPs don't pay taxes on profit. Investors in the partnerships pay on distributions, but even then they usually only are treated as return of capital rather than as a dividend, a critical issue with most investors expecting to pay higher dividend taxes next year.
"This is like a massive tax shelter," said Michael Cohn, chief market strategist at Atlantis Asset Management in New York. "The perception is that they're going to change all the rules on these things. That's an idiotic assumption."
MLPs must be structured so that they derive at least 90 percent of their cash flow from real estate, natural resources or commodities.
In addition to capitalizing on the energy exploration boom, the partnerships hold two pivotal advantages: They provide a steady stream of income and can be bought and sold like stocks.
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