Non-Dividend Distributions: 2025 Return of Capital at 38 Funds

What the tax code means by a non-dividend distribution

The words come from 26 U.S.C. 301(c), which splits any corporate distribution into three pieces:

• (c)(1): “That portion of the distribution which is a dividend (as defined in section 316) shall be included in gross income.”
• (c)(2): “That portion of the distribution which is not a dividend shall be applied against and reduce the adjusted basis of the stock.” This is the non-dividend distribution, also called return of capital.
• (c)(3)(A): the non-dividend part, “to the extent that it exceeds the adjusted basis of the stock, shall be treated as gain from the sale or exchange of property.”

What counts as a dividend is decided by section 316(a), by the payer's earnings and profits: “every distribution is made out of earnings and profits to the extent thereof, and from the most recently accumulated earnings and profits.” A REIT or a fund that pays out more than its earnings and profits for the year, and has none left from earlier years, pays the excess as a non-dividend distribution. Earnings and profits are not the same as cash flow: section 312(k)(1) still subtracts depreciation, as “the amount which would be allowable for such year if the straight line method of depreciation had been used”, so a property owner with steady rent can have little or no earnings and profits while sending out the same cash every month (our reading of 312(k) and of why property REITs dominate the table below).

Two REIT rules shape the rest of the 1099-DIV. Section 857(a)(1) makes a REIT distribute at least “90 percent of the real estate investment trust taxable income” to keep its status; it can pay more, and the part above earnings and profits is box 3. Section 857(b)(3)(A) says a capital gain dividend is taxed to you “as a gain from the sale or exchange of a capital asset held for more than 1 year”, which is box 2a. And under 857(b)(9) a dividend declared in October, November or December and paid in January is treated as received “on December 31 of such calendar year”; that is why several REITs say their December declaration belongs to the following tax year.

Where the number appears before your 1099-DIV

Box 3 of the 1099-DIV is the last place you see it. The IRS instructions tell the payer only to “Enter nondividend distributions, if determinable.” Three earlier documents carry the same figure:

1. A January 8-K or prospectus supplement. Five REITs in our census published their 2025 split this way within a month of year-end: Starwood REIT in a 424B3 of January 16, 2026; InPoint and Inland Real Estate Income Trust in 8-Ks of January 26; IPC Alternative on January 28; JLL Income Property Trust in a press release dated January 29. For Starwood, JLL and InPoint the 2025 10-K gives no split at all, so a reader of the annual report alone would conclude it is not published.
2. Form 8937. Section 6045B(a) requires an issuer to report any action that affects basis and “the quantitative effect on the basis of such specified security resulting from such action”, and section 6045B(c) requires a statement to holders by January 15 of the following year. The IRS instructions are direct: “you must file Form 8937 if you make a nontaxable cash distribution to shareholders.” The issuer can skip filing with the IRS if it posts the form on its website and keeps it there for 10 years, so the place to look is the sponsor's tax or investor-relations page, not EDGAR.
3. The 10-K or N-CSR tax note, in February to March for calendar-year funds, later for funds with September or March fiscal years.

The 19(a) notice is not your box 3

Interval funds and BDCs send a second kind of notice. Section 19(a) of the Investment Company Act (15 U.S.C. 80a-19(a)) bars a registered fund from paying a distribution from anything other than net income “unless such payment is accompanied by a written statement which adequately discloses the source or sources of such payment.” The SEC's Rule 19a-1(a) lists the sources, the third being “Paid-in surplus or other capital source.” That notice is built on book accounting during the year. The tax character is decided after year-end and can come out differently, as two funds in our census say themselves:

• KKR Real Estate Select Trust: “For tax purposes, a distribution that for purposes of GAAP is comprised of return of capital and net investment income may be subsequently re-characterized to also include capital gains.”
• Blue Owl Capital Corp II's statement of changes in net assets says 2025 distributions “were derived from net investment income and return of capital”; its tax note then puts the return of capital at $5.9 million of a $90.1 million taxable dividend amount, with $83.9 million ordinary income.

Use the 19(a) notice to see whether a fund is paying out more than it earns. Use box 3, or the Form 8937, for your basis (our reading).

REITs: 2025 return of capital, 20 vehicles

Each row is the share of 2025 distributions that the REIT characterized as return of capital (non-dividend), as written in the filing named. Several REITs measure distributions paid in the calendar year; BREIT says “The distributions declared on December 31, 2025, 2024 and 2023 were paid in January of the following year” and are left out. For box 5, the ordinary part, see our Section 199A dividends census; this table adds six REITs and the filings outside the 10-K.

The split follows the business (our reading). Owners of apartments, warehouses and offices with large depreciation sit at the top; lenders (FS Credit, CIM Real Estate Finance Trust) earn interest, which is ordinary income, and sit near the bottom. REITs that reported capital gain distributions for 2025 (Cottonwood, RREEF, JLL, Invesco), which come from property sales, turned part of the payout into capital gain, which is taxed when you receive it at long-term rates. JLL adds a detail most 1099 readers miss: 62.6% of its capital gain income is unrecaptured section 1250 gain, which 26 U.S.C. 1(h)(1)(E) taxes at “25 percent” at most rather than the usual long-term rates (see our depreciation recapture guide). JLL's press release calls its figures preliminary and “subject to adjustment”, and its chief executive says that over 13 years “100% of our distributions have been characterized as either return of capital or long-term capital gain.”

BDCs: almost no return of capital

A business development company is taxed as a regulated investment company and lends to private companies. Interest is ordinary income, and a lender with more income than payout has nothing to return. Eight of the nine non-traded BDCs we checked reported no return of capital for tax year 2025.

OBDC II's 2025 figure was small; its 2026 distributions are a different story, which we follow in OBDC II's return-of-capital payouts. Blue Owl Credit Income Corp's 10-K also shows how sponsors used to manage this number: until March 7, 2023 it had an expense support agreement “the purpose of which was to ensure that no portion of our distributions to shareholders represented a return of capital for tax purposes.”

Interval and tender-offer funds: depends on what they own

Real estate interval and tender-offer funds are taxed either as regulated investment companies or as REITs; KKR Real Estate Select Trust says “The Fund has elected to be taxed as a REIT.” A fund that owns private REITs and real estate funds receives their return of capital and passes it on; Bluerock's N-CSR lists “return of capital distributions from underlying investments” among its book-to-tax differences. Fiscal years differ, so each row is the fund's latest annual report.

The year before looked different for several of them, which is the practical warning: Apollo Diversified went from 91.1% return of capital in fiscal 2024 to 35.2% in fiscal 2025 while paying $123.4 million of long-term capital gain; Bluerock from 90.6% to 69.3%; NexPoint from 60.6% to 99.2%; CIM Real Assets & Credit from 38.0% to 50.2% (all our arithmetic from the N-CSR tables).

In dollars: what came off a share's basis

Percentages do not tell you what to subtract. Where the filing gives per-share amounts, the basis cut for 2025 is:

The BREIT line is our estimate: the 10-K gives return-of-capital percentages on a paid basis (85.01% in 2023, 96.27% in 2024, 100% in 2025) and per-share amounts on a declared basis, so multiplying them is close but not exact. On that estimate, a Class I share bought before 2023 had about $1.86 of basis returned by the end of 2025, about 13.2% of its December 31, 2025 NAV of $14.1339 (our arithmetic). More on the fund in our BREIT review.

Keeping your own basis ledger

Nobody sends a running basis figure for a non-traded share. IRS Publication 550 gives the rules you need:

• It is deferral, not exemption. “A nondividend distribution reduces the basis of your stock. It is not taxed until your basis in the stock is fully recovered.”
• At zero, it is taxed every year. “When the basis of your stock has been reduced to zero, report any additional nondividend distribution you receive as a capital gain.” The publication's own example: $100 of basis, an $80 non-dividend distribution, then $30 more; “The first $20 of this amount reduced your basis to zero. You report the other $10 as a long-term capital gain for 2025.”
• Several purchases. If you cannot identify which shares a distribution relates to, “reduce the basis of your earliest purchases first.”
• Reinvested distributions are purchases. JLL's 10-K states the rule for its reinvestment plan: you “will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested” to the extent it was not a return of capital. Each reinvested lot starts with its own basis, and later return of capital reduces it too.

The ledger is what turns a falling NAV into the right number at sale: a share bought at $10.00 that received $1.25 of return of capital has a $8.75 basis, so a sale at $9.00 is a $0.25 gain, not a $1.00 loss (our arithmetic, hypothetical round numbers). For when the 2026 forms are due, see our 1099-DIV due dates for non-traded funds, and for funds that send a K-1 instead, K-1 vs 1099-DIV.

What a holder can do with this

• Before you plan a December sale, find last year's split for your vehicle in the CSV, then look for this year's Form 8937 on the sponsor's website in January; if the REIT files 8-Ks, the January filing usually comes before the 1099-DIV.
• Add up box 3 on every 1099-DIV you have for the position and subtract it from what you paid, lot by lot, earliest lots first.
• Do not use a 19(a) notice for your basis; wait for box 3 or the Form 8937.
• If your basis is near zero, expect each further non-dividend distribution to be a capital gain in the year you receive it.

This is analysis of public documents, not investment, legal or tax advice.

FAQ

Sources, read and saved on October 11, 2026: SEC EDGAR Form 10-K filings for 2025 of Blackstone Real Estate Income Trust (0001662972-26-000032), Ares Industrial (0001628280-26-015438), Hines Global Income Trust (0001628280-26-022047), Brookfield REIT (0001713407-26-000021), Nuveen Global Cities REIT (0001711799-26-000015), Ares Real Estate Income Trust (0001628280-26-015437), Fortress Net Lease REIT (0001193125-26-126080), J.P. Morgan REIT (0001193125-26-107971), Blue Owl Real Estate Net Lease Trust (0001944366-26-000020), Invesco REIT (0001756761-26-000032), North Haven Net REIT (0001999784-26-000021), FS Credit REIT (0001628280-26-017626), RREEF Property Trust (0001542447-26-000020), Cottonwood Communities (0001692951-26-000055), CIM Real Estate Finance Trust (0001498547-26-000013), JLL Income Property Trust (0001314152-26-000030), Starwood REIT (0001193125-26-117060), InPoint (0001690012-26-000002), BCRED (0001803498-26-000014), HLEND (0001628280-26-020206), Apollo Debt Solutions BDC (0001193125-26-102386), Blue Owl Credit Income Corp (0001812554-26-000011), Ares Strategic Income Fund (0001918712-26-000018), MSC Income Fund (0001535778-26-000026), Blue Owl Capital Corp II (0001655887-26-000010), Golub Capital Private Credit Fund (0001930087-25-000070) and Prospect Floating Rate & Alternative Income Fund (0001521945-26-000095); Form 8-K filings of JLL Income Property Trust (0001314152-26-000012), InPoint (0001193125-26-022606), IPC Alternative Real Estate Income Trust (0001193125-26-027041) and Inland Real Estate Income Trust (0001193125-26-022199); Starwood REIT's 424B3 of January 16, 2026 (0001193125-26-014899); Form N-CSR filings of KKR Real Estate Select Trust (0001193125-26-086188), NexPoint Real Estate Strategies Fund (0001193125-26-101846), Goldman Sachs Real Estate Diversified Income Fund (0001193125-25-309827), Bluerock Private Real Estate Fund (0001398344-25-022118), CIM Real Assets & Credit Fund (0001580642-25-007690), Apollo Diversified Real Estate Fund (0001398344-25-022019), Forum Real Estate Income Fund (0001213900-26-025569), PIMCO Flexible Real Estate Income Fund (0001193125-26-094219) and Harrison Street Real Assets Fund (0001213900-26-065340); 26 U.S.C. 1, 301, 312, 316, 857 and 6045B and 15 U.S.C. 80a-19 from govinfo.gov (2024 edition); 17 CFR 270.19a-1 from the eCFR; IRS Instructions for Form 1099-DIV, Instructions for Form 8937 and Publication 550 (2025) from irs.gov. Counts, the median, shares, per-share sums and the BREIT approximation are our arithmetic. This is analysis of public documents, not investment, legal or tax advice.