Unitholder

What Is a Unitholder?

A unitholder is an investor who owns one or more units in an investment trust or master limited partnership (MLP). A unit is equivalent to a share, or piece of interest. Unitholders are afforded specific rights that are outlined in the trust declaration, which governs the trust's actions.

The most common type of unit trust is an investment vehicle that pools funds from investors to purchase a portfolio of assets. These unit trusts invest in many asset classes of stocks (large-cap, small-cap, domestic, international, etc.), bonds (investment grade, high-yield, emerging market, tax-free, etc.), real estate, and other securities.

Understanding Unitholders

There is a whole spectrum of risk/reward choices for investors in these unit trusts. The unitholder gains exposure to a pool of securities and is free to trade units at any time, though a unit trust tends to be less liquid than, say, an exchange-traded fund (ETF), and the price of the traded unit may not be equivalent to net asset value (NAV) of the unit trust per share.

Unitholders may also have an interest in a master limited partnership (MLP), an investment vehicle that offers significant tax advantages to both general and limited partners. Most MLPs are in the energy sector. For example, pipeline companies prefer the MLP structure to offer preferential tax treatment of cash flows to partners and unitholders. What primarily attracts unitholders is the potential for high-income yields of MLPs.

One difference between unitholders and shareholders is that while unitholders may have some voting rights, those rights are often quite a bit more limited than those of corporate shareholders.

Unitholder Taxation

For unit trusts, unitholders pay income taxes on interest, dividends, and capital gains distributed to them if the units are held in a taxable account. The unit trusts send all unitholders IRS Form 1099, typically 1099-INT or 1099-DIV.

In the case of master limited partnerships (MLPs), each unitholder's proportion of income, gains, deductions, losses, and credits is reported on a Schedule K-1. If the net amount is positive the unitholder pays tax on a pass-through basis whether or not a cash distribution was actually received; if there is a net loss, the amount can be carried forward and used against future income, but only from the same MLP.

The Tax Cuts and Jobs Act, passed in 2017, introduced a new tax deduction for pass-through businesses, including unit investment trusts. The qualified business income deduction, or 199A deduction, allows non-corporate taxpayers to deduct up to 20% of the qualified business income from each pass-through business they own.

Example of a Unitholder

Let's say an investor is interested in being a unitholder in a real estate investment trust (REIT). The investor does their due diligence and decides to purchase shares in Prologis, Inc. (PLD), the largest real estate company in the world because they like the assets in the portfolio and its potential for growth in the current market environment. All income that the unitholder receives will be taxed as pass-through income.