What is return of capital?

Updated 14 October 2026 · 5 min read

Return of capital (ROC) is the portion of a fund distribution that is a repayment of the investor’s own invested capital rather than a payout of income or gains. It is generally not taxed when received; instead it reduces the investor’s cost basis, and once basis reaches zero any further return of capital is taxed as a capital gain.

A fund distribution can come from three places: income the fund earned (interest, dividends, rent), gains it realised by selling assets at a profit, or the investors’ own capital handed back. The first two are earnings. The third is return of capital, and it is why a distribution yield on its own never tells you what a fund actually earned.

How return of capital is taxed

In the United States, a distribution that is a return of capital is a nondividend distribution. It is generally not taxable when received. Instead it reduces the investor’s cost basis in the shares. Once the basis has been reduced to zero, any further return of capital is taxed as a capital gain. For funds that report on Form 1099-DIV, nondividend distributions appear in their own box, separate from ordinary dividends and capital gain distributions.

Deferring tax is not the same as avoiding it. A lower basis means a larger taxable gain, or a smaller loss, when the shares are eventually sold or repurchased.

Where it shows up in semiliquid funds

Non-traded REITs: depreciation reduces taxable earnings without reducing cash, so a REIT can distribute more cash than its taxable earnings and profits. The excess is return of capital, which is why REIT distributions often carry a large return-of-capital share.
Interval and tender-offer funds with a level distribution policy: a fund that pays a steady rate may pay out more than it earned in a given period, and the difference can be return of capital.
BDCs: most distributions are income, because the tax regime requires paying out taxable income, but a distribution can still include return of capital when payouts exceed earnings.

Not all return of capital is the same

Practitioners often distinguish two cases. In the first, return of capital reflects a tax timing effect such as depreciation, while the fund’s underlying value holds up. In the second, the fund is simply paying out more than it earns, so the distribution is funded by shrinking the asset base and net asset value declines over time. The tax form looks the same in both cases; the difference shows up in NAV and total return.

How funds disclose it

Under Section 19(a) of the Investment Company Act and Rule 19a-1, a registered fund that pays a distribution from any source other than net investment income must send a written notice identifying the sources. These notices are estimates made at the time of payment. The final tax character of the year’s distributions is only known after year end, and is reported on Form 1099-DIV, so the two can differ.

What to check

The return-of-capital share across several years, not one: a single year can be distorted by timing.
Whether the figure is on a tax basis (what investors receive on a 1099) or a book basis (the fund’s financial statements). They can differ.
Distribution yield next to total return and NAV: a high yield with a falling NAV is a sign that capital is being paid back.
Whether the fund reports on a 1099-DIV or a K-1, which changes how distributions are characterised.

Kesta shows the character of each fund’s distributions, income, gains and return of capital, from its tax notes and annual reports, including the split REITs disclose in their 10-K filings, with the basis stated next to the number.

Common questions

Is return of capital bad?

Not necessarily. Return of capital that comes from a tax timing effect such as REIT depreciation can coexist with a healthy fund. Return of capital that comes from paying out more than the fund earns shrinks the asset base. Look at NAV and total return over several years, not the distribution alone.

Is return of capital taxable?

Generally not when it is received. It reduces your cost basis in the shares, which increases the taxable gain when you sell. Once your basis reaches zero, further return of capital is taxed as a capital gain.

Where is return of capital reported?

For funds that report on Form 1099-DIV, nondividend distributions are reported in their own box. During the year, registered funds paying from sources other than net investment income send Section 19(a) notices estimating the sources.

Why do REITs pay so much return of capital?

Depreciation is a large non-cash expense for real estate. It lowers taxable earnings without lowering the cash a REIT can distribute, so part of the distribution typically exceeds earnings and profits and is classified as return of capital.

What is the difference between a 19(a) notice and the 1099-DIV?

A Section 19(a) notice estimates the sources of a distribution when it is paid. The Form 1099-DIV reports the final tax character after the year closes. The final split can differ from the estimates.

Sources

Educational content by Kesta, the neutral data layer for liquid and semiliquid alternatives. Not investment, legal, or tax advice. Keep learning: What is a REIT? · What is an interval fund? · What is a BDC? · all guides · fund directory.