Return of Capital
A distribution to investors that returns a portion of their original investment rather than distributing earnings, reducing their cost basis in the investment.
Return of Capital
A distribution to investors that represents a return of their original investment rather than a distribution of earnings, typically occurring when distributions exceed accumulated earnings.
For instance, a real estate investment trust (REIT) might distribute $1 per share annually, with $0.70 classified as ordinary dividends from earnings and $0.30 as return of capital due to depreciation deductions reducing taxable income below distribution levels.
Return of capital distributions are not immediately taxable but reduce the investor’s cost basis in the investment, potentially increasing capital gains when the investment is sold. For companies, these distributions reduce paid-in capital rather than retained earnings, distinguishing them from regular dividends.