7774 / How are master limited partnerships (MLPs) treated under the passive loss rules?

Investors are subject generally to an annual passive activity loss restriction. A passive activity loss is the amount for the taxable year by which aggregate losses from all passive activities exceed aggregate income from those activities.¹

However, the IRC stipulates that the passive loss restriction applies for each individual MLP.² Thus, a limited partner is not permitted to combine passive losses from any other MLP or from any other source.³ The result of the passive loss restriction is that a limited partner’s loss can only offset income from the master limited partnership that caused the loss.

Congress has provided two avenues of relief from this restriction. If a limited partner has remaining passive activity losses, the losses are carried forward, and can offset future passive income of that MLP.⁴ Moreover, when a limited partner disposes of the entire interest in an MLP, any remaining passive losses may offset income from other sources.⁵

See Q 8010 to Q 8022 for a detailed discussion of the passive loss rules.