Definition and Example of Real Estate Distributions
How Do Real Estate Distributions Work?
What Does This Mean for Investors?
Definition and Example of Real Estate Distributions
The term “real estate distributions” refers to a type of distribution that is paid in assets rather than cash. Real estate distributions can be used for various reasons. They are generally not as common as cash distributions. Learn more about how they work here.
A real estate distribution is a type of distribution consisting of an asset instead of cash. Companies can choose to pay investors with an asset such as a product by calculating the market value of that product. Then, the amount of the product to be sent to the investor is determined to match the value of the distribution.
Note: The type of asset that a company can issue as a distribution may vary. It could be any tangible asset that the company owns, such as inventory or real estate. A real estate distribution may also be issued in the form of a share in a subsidiary in some cases.
Companies typically choose to issue real estate distributions when they do not have enough cash available to pay cash dividends. They may also opt for real estate distributions if they do not want to dilute their current equity position by distributing regular dividends. A company might choose to pursue real estate distributions if the fair market value of the asset in question differs significantly from its book value.
Let’s assume Acme Company has stored 1,000 limited edition Warhol prints signed by the artist. The company spent $1,000,000 to acquire these artworks. Their fair market value is $8,000,000 when the distribution announcement is due. Now Acme Company has $8,000,000 in asset value to issue real estate distributions instead of cash or stock.
You can see below how Acme Company would record the change in the value of the asset and the obligation to pay the distributions:
Debit Credit
- Long-term Investment (Artworks) $7,000,000
- Gain on Artwork Revaluation $7,000,000
Credit Credit
- Retained Earnings $8,000,000
- Distributions Payable $8,000,000
How Do Real Estate Distributions Work?
A distribution is a portion of a company’s net earnings distributed to qualifying shareholders by a publicly traded company. Public companies issue these distributions to reward shareholders for investing in the company. Cash and stock distributions are the most common types of distributions issued, but distributions can occur in various forms such as mutual funds, exchange-traded funds, or real estate.
When a company issues real estate distributions, it is typically a signal that it does not have enough cash or available shares to issue large distributions. It may also indicate that it does not want to liquidate its current equity positions.
Real estate distributions carry cash value even though they are a non-cash type of distribution. Real estate distributions can also help reduce or defer taxes. Receiving a high-value asset can lower the taxable amount compared to selling the asset to issue a cash distribution. For this reason, companies prefer to issue real estate distributions if the fair market value of the assets differs significantly from their book value. Investors benefit from the ability to hold onto the assets for an extended period without needing to liquidate them.
Note: Real estate distributions are recorded at the market value of the distributed asset.
These distributions can be issued in the form of assets such as real estate, investment shares, and even tangible assets or inventory. Shareholders may choose to hold the asset for long-term gains in the future, which is a good option for investors looking for a long-term investment.
Value
The fair market value of an asset differs from its book value, so the company will be required to record this difference in value as a loss or gain. Based on this requirement, some companies choose to issue property dividends with the aim of altering taxable income and operating income.
What does this mean for investors?
If you are an investor looking to earn profits to help grow your wealth, it’s important to understand the different types of distributions. If a property dividend is offered instead of a cash distribution, you will want to know how the value of this distribution works. You will also want to make a decision on whether to hold the property dividend as a long-term investment or not. It may have a positive value in your portfolio, or you may find that it does not fit your investment strategy. Consider all the options available to you when it comes to investing in dividends before making the right decision for you.
Takeaways:
- A property dividend is a type of distribution paid in the form of assets instead of cash.
- Companies typically issue property dividends when they do not have enough cash or stock available to issue significant distributions.
- Property dividends are non-cash types of distributions, but they have cash value.
- Property dividends can be issued in the form of assets like real estate, investment shares, physical assets, or inventory.
- A shareholder can choose to keep the asset received as a property dividend as a long-term investment.
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Sources:
- IRS. “Topic No. 404 Dividends.”
- Joey Thompson. “Dividend Growth Investing,” Page 4.
Sources:
- IRS. “Topic No. 404 Dividends.”
- Joey Thompson. “Dividend Growth Investing,” Page 4.
Sources:
- IRS. “Topic No. 404 Dividends.”
- Joey Thompson. “Dividend Growth Investing,” Page 4.
Source: https://www.thebalancemoney.com/property-dividend-5220499
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