Return of Capital (ROC)

A distribution that an investor receives from a portion of their original investment and is not considered income or capital gains from the investment. Although ROC distributions are typically not taxable, it is important to note that such distributions reduce the adjusted cost basis of the investment.

For example, Real Estate Investment Trusts (REITs) often have ROC distributions as they are required to distribute a large portion of their cash flow to shareholders. Sometimes distributions include a portion of operating profit that was previously sheltered from tax due to depreciation of real estate assets. This portion of the payout is considered a ROC. The income they distribute as ROC is the amount that exceeds the REIT’s taxable income. Taxes due on ROC distributions are usually deferred until the sale of REIT shares, when lower capital gain tax rates typically apply.