Table of Contents
- What Is a Distribution-in-Kind?
- Key Takeaways
- Understanding Distributions-in-Kind
- Advantages of Distributions-in-Kind
- Distributions-in-Kind in Real Estate and Trusts
- What Is a Required Minimum Distribution?
- How Does Capital Gains Tax Compare to Income Tax?
- What's the Difference Between Dividends and Distributions?
- The Bottom Line
What Is a Distribution-in-Kind?
Let me explain what a distribution-in-kind is—it's a payment you receive in the form of securities or other property instead of cash. You might see this in situations like stock dividends, inheritances, or when you're taking securities out of a tax-deferred account. It can also mean transferring an asset directly to a beneficiary rather than selling it and sending the cash.
Key Takeaways
Distributions-in-kind are simply payments made in something other than cash, like property or stock. Companies and organizations turn to them to cut down on tax liabilities and sidestep capital gains taxes from asset value increases. Keep in mind, though, that taxes can still apply in cases like real estate deals.
Understanding Distributions-in-Kind
As an investor, you can put money into a company through bonds or stocks. Bonds give you interest payments, while stocks offer dividends and potential share price growth. Normally, dividends or buybacks mean cash going to you. Companies doing well pay solid dividends and buy back shares, but those struggling might borrow to do the same or opt for distributions-in-kind instead.
These in-kind distributions often come down to taxes. In some cases, getting appreciated property directly means a smaller tax hit than selling it for cash. Funds sometimes use them after a redemption threshold to avoid big tax impacts from high activity.
Advantages of Distributions-in-Kind
These aren't just good for the company issuing them—you as an investor in tax-deferred accounts can benefit too, since they help lower your taxes. If you're inheriting shares, you'll often get them in-kind for that reason. With individual retirement plans, you can take distributions-in-kind, like for required minimum distributions, pulling out actual stocks and bonds without selling them.
This approach works well if you want to stay fully invested. It's especially useful for undervalued stocks that might rise, letting you treat the gain as a capital gain instead of ordinary income, which gets taxed higher. In venture capital and private equity, funds prefer handing out securities to partners to dodge capital gains on sales.
Distributions-in-Kind in Real Estate and Trusts
When it comes to real estate, in-kind distributions might not escape capital gains taxes. If a company distributes property instead of cash, it still pays taxes on any price appreciation. The same goes for transfers to estates or trusts—the settlor reports any gains or losses on their tax returns.
What Is a Required Minimum Distribution?
A required minimum distribution is the amount you must pull from your retirement account each year once you hit age 72 or 73, based on your birth year. The IRS sets this to make sure you're withdrawing funds rather than leaving them tax-sheltered forever. If you're still working at that age, you can delay RMDs from your workplace plan unless you own 5% or more of the sponsoring business.
How Does Capital Gains Tax Compare to Income Tax?
Capital gains taxes are usually lower than income taxes, ranging from 0% to 20%, with exceptions like 28% for some stocks or collectibles and up to 25% for real estate. Income taxes can go as high as 37%, with brackets at 10%, 12%, 22%, 24%, 32%, 35%, and 37% for 2024.
What's the Difference Between Dividends and Distributions?
Dividends and distributions both pay out to investors, but they're taxed differently—dividends come from after-tax funds, while distributions use before-tax funds.
The Bottom Line
Not every distribution comes in cash—some are in-kind. The typical example is a company paying dividends in stock rather than money. You see this in real estate, trusts, venture capital, and private equity, mainly for tax purposes.
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