While the zero-basis boundary triggers immediate taxation for lifetime holders, keep holding if you are planning the estate. In a taxable brokerage account held until death, MLPs provide one of the cleanest tax-arbitrage strategies in the tax code:
Two structural shifts occur simultaneously at death:
Under IRC §1014, “Basis of property acquired from a decedent”, your heirs receive a stepped-up basis in the MLP units equal to the fair market value at the date of death. The entire decade of accumulated basis reductions (ROC distributions) is legally erased, along with any capital gains liability.
On a lifetime sale, the accumulated depreciation deductions allocated to you over the holding period would be recaptured under IRC §1245, “Gain from dispositions of certain depreciable property” and taxed at your maximum marginal ordinary income tax rate (up to 37%), rather than preferential capital gains rates. This depreciation recapture liability is entirely eliminated by the step-up at death.
Consistently, the optimal strategy for direct MLP ownership is binary: buy high-quality midstream assets with the intent to hold them permanently, accept the administrative overhead, let the basis grind down to zero, and pass the units through your estate to execute a complete tax wipe. Trimming or rebalancing these positions in a taxable account during your lifetime destroys this arbitrage, triggering a massive ordinary income tax bill due to depreciation recapture.