Both MLPs and REITs exist because Congress wanted to channel private capital into specific sectors — energy infrastructure and real estate — without double taxation. Both offer above-average yields. But their tax treatment is radically different, and which one “pays more” depends almost entirely on what kind of account you hold it in and what your marginal tax rate is.
The structural difference
A REIT is a corporation. It pays no corporate income tax as long as it distributes at least 90% of taxable income to shareholders. Dividends flow on a 1099-DIV, just like any other stock. An MLP is a partnership. There is no corporate entity — you own a proportional share of the business directly, which means the business's income, deductions, and depreciation flow through to you personally on a K-1.
That K-1 is both the source of MLPs' tax advantage and the source of their complexity. The pipeline or gathering system the MLP owns depreciates over time, and that depreciation flows through to you as a tax deduction — offsetting much of the income you receive. For the first several years of holding an MLP, you often pay little or no tax on distributions.
Tax character — where the difference shows up
| Factor | MLP | REIT |
|---|---|---|
| Tax form | K-1 (Schedule E) | 1099-DIV |
| Distribution character | Return of capital (mostly) | Ordinary income (mostly) |
| Near-term tax burden | Low — deferred by depreciation | Moderate — taxed as ordinary income |
| Long-term liability | Recapture on sale (ordinary rates) | None on qualified REIT dividends |
| 20% QBI deduction (Section 199A) | Yes — on partnership income | Yes — on REIT dividends |
| UBTI in an IRA | Yes — can trigger tax in IRA | No — clean for IRAs |
| State returns | May need to file in each state | Single 1099, no state K-1s |
“An MLP in an IRA sounds like a great idea until you get a UBTI bill. Hold MLPs in taxable accounts. Put REITs in your IRA.”
UBTI: the IRA trap
Unrelated Business Taxable Income is the reason you should never hold an MLP in an IRA or 401k. IRAs are exempt from federal income tax — but only on investment income. If your IRA owns a stake in a partnership, the operating income of that partnership is considered “unrelated business income” and is taxable even inside the IRA. If UBTI from all sources exceeds $1,000 in a year, your IRA custodian must file a Form 990-T and pay taxes at trust rates, which are compressed and reach 37% quickly.
REITs are corporations, so their dividends are simply investment income in an IRA — no UBTI. This makes REITs significantly better suited to tax-advantaged accounts, especially if you're in a high bracket and want to shelter the ordinary income treatment of REIT distributions.
After-tax yield by account type
Assume a 32% marginal rate, $10,000 invested, 8% gross yield on both. That's $800/year in gross distributions.
Taxable account — REIT
~$544 after-tax (6.8% net yield)
Section 199A deduction reduces the taxable portion by 20%, bringing effective rate closer to 25.6%. Net ≈ $595 / 7.4% net yield.
Taxable account — MLP
~$800 near-term (8% effective yield)
Deferred, not eliminated. Basis reduces over time; on sale, recaptured at ordinary rates. Effectively front-loads after-tax income.
IRA — REIT
$800 compounding (8%)
Best use case. Ordinary income sheltered. No UBTI issue.
IRA — MLP
Potentially < taxable account yield after UBTI
Generally avoid. Use MLP ETFs (like AMLP) instead — they're corporations, no K-1, no UBTI.
Which to choose
For most individual investors, the practical answer is: REITs in your IRA, MLPs in your taxable account. The REIT distributions are fully sheltered from tax inside a retirement account. The MLP distributions are tax-deferred in a taxable account via the K-1 mechanism — effectively front-loading your after-tax yield. The K-1 complexity is real but manageable; most tax software handles it, and your accountant likely has seen hundreds.
If you want MLP exposure without K-1s, consider MLP ETFs. They hold MLPs inside a C-corp wrapper, eliminating the K-1 and UBTI — but introducing a layer of corporate taxation that reduces the yield meaningfully. You trade complexity for simplicity at a cost of roughly 1–2% in after-tax yield.
Bottom line
On a pre-tax basis, MLPs often yield more. On an after-tax basis in a taxable account, the gap narrows but MLPs still win in the near term due to basis reduction. In an IRA, REITs win clearly and MLPs can actually hurt you. Account location is the single biggest lever you can pull on after-tax income — more so than choosing between a 7% REIT and an 8% MLP.