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Return Of Capital Formula:
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Return Of Capital (ROC) is a payment that an investor receives from an investment that is not considered income or capital gains from the investment. Instead, it is a return of part of the investor's original investment.
The calculator uses the Return Of Capital formula:
Where:
Explanation: The formula calculates the portion of distributions that represents a return of the original investment rather than investment income.
Details: Calculating Return Of Capital is important for tax purposes, as ROC distributions are typically not taxed as income in the year they are received. Instead, they reduce the investor's cost basis in the investment.
Tips: Enter the total distributions received and total earnings generated by the investment in dollars. Both values must be non-negative numbers.
Q1: How is Return Of Capital different from dividends?
A: Dividends represent a distribution of corporate earnings to shareholders, while Return Of Capital represents a return of part of the investor's original investment.
Q2: What are the tax implications of Return Of Capital?
A: ROC is generally not taxed as income when received but reduces the cost basis of the investment, which may result in higher capital gains when the investment is eventually sold.
Q3: Can Return Of Capital be negative?
A: Yes, if earnings exceed distributions, the ROC would be negative, indicating that all distributions came from earnings rather than capital.
Q4: How does ROC affect investment returns?
A: ROC distributions reduce the investor's cost basis, which can make the investment appear more profitable than it actually is when calculating percentage returns.
Q5: Is Return Of Capital always a good thing?
A: Not necessarily. While it provides tax-deferred cash flow, it reduces the investor's capital base and may indicate that the investment is not generating sufficient earnings.