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What are the downsides of limited partnerships?

November 23, 2012: 6:30 AM ET

Are there any downsides to investing in a limited partnership, as opposed to stocks? — Mike Davis, California

In a nutshell, yes. Though master limited partnerships — which earn income chiefly from real estate, natural resources, and commodities — often yield more than shares of their plain-vanilla corporate cousins, they have their drawbacks.

Legal intricacies make filing your tax return confusing and time consuming. MLP income over $1,000 in a retirement account is taxed. And because of the way an MLP's tax basis is calculated, you could face a surprisingly big capital gains levy when you sell.

Another minus: MLP investors generally have less control over management than do a public company's shareholders, says New York City CPA Ryan Himmel. So, buyer, beware even more than usual.

— Susie Poppick

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