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Also known simply as ROC, a return of capital is the amount of return from any investment where that return is not considered to constitute profit or income. Often, this figure represents the original amount of financial resources that were initially invested in some type of business or investing venture, but not any type of profits that were generated as a result of the investment. This type of financial transaction is different from a return on capital, which focuses on the profit that is generated as a result of that initial capital investment.
There are several situations that may result in a return of capital. With a real estate deal, the owner does not begin to actually generate a profit until he or she has recovered the original investment in the property. For example, if the owner purchases a property for the amount of $200,000 in US dollars (USD), but sells the property three months later for a total of $250,000 USD, then the return of capital amounts to the original purchase property. At the same time, the return on capital comes to $50,000 USD, since that is profit earned above and beyond that original investment. If the home is sold for the same amount as the original purchase price, the owner achieves a return of capital, but no return or profit on the capital.
A return of capital does not necessarily involve the full return of the original investment. Trusts of different types may choose to return part of the initial investment to their investors, while still retaining a portion of that investment. This results in a situation where the investor will receive less of a return on capital in the future, since the amount invested in the venture is reduced.
Depending on the circumstances surrounding the investment, and the tax codes that apply to investing in general, it is highly unlikely that a return of capital will result in the creation of tax debt for the investor. The assumption is that taxes had already been assessed on the funds used to make the initial investment. Thus, there would be no need to assess taxes again, since the investor had not earned any type of profit from that return of capital. While the return of capital may technically be considered a type of income in some countries, it is usually considered exempt income that does not generate any type of capital gain that is subject to taxes. The amount also does not generate any type of capital loss that can be used as a deduction on tax filings.
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