Legal Definitions - capital return

A capital return refers to money or value received from an investment that represents either a repayment of the original amount invested (the principal) or an increase in the value of the asset itself. Unlike income or dividends, which are typically generated from the asset's operations or profits, a capital return is fundamentally about getting back your initial investment or realizing the appreciation of that investment's underlying value.

• Example 1: Stock Buyback

  Imagine a publicly traded company decides to reduce its outstanding shares by buying back a portion of them directly from shareholders. If you owned shares in this company and sold them back as part of this program, the money you receive for those shares would be considered a capital return. It's not a dividend (which comes from company profits), but rather the company returning a portion of the capital you invested when you originally bought the shares.

• Example 2: Sale of Real Estate

  Suppose you purchased a piece of land for $100,000 several years ago. Today, you sell that land for $150,000. The first $100,000 you receive from the sale is a return of your original capital investment. The additional $50,000 profit is also a form of capital return, specifically a capital gain, representing the appreciation in the asset's value over time. Both components together illustrate a capital return.

• Example 3: Partnership Distribution

  Consider a partner in a small business who initially invested $50,000 to help start the company. After a few years, the business has excess cash and decides to return some of the partners' initial contributions rather than distributing profits. If this partner receives a $20,000 distribution explicitly designated as a repayment of their original investment, this would be a capital return. It reduces their capital account in the partnership but is not taxed as ordinary income from profits.