# Understanding Distribution-in-Kind: Definition, Benefits & How It Works

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> **Definition**
>
> A distribution-in-kind is a payment made in the form of securities or property instead of cash, often used for tax advantages in various financial situations such as stock dividends or inheritances.

## What Is a Distribution-in-Kind?

A distribution-in-kind, also called a distribution-in-specie, is a payment made in the form of [securities](https://www.investopedia.com/terms/s/security.asp) or other property rather than cash. It's commonly used for [stock dividends](https://www.investopedia.com/terms/s/stockdividend.asp), inheritance transfers, or when withdrawing securities from a [tax-deferred](https://www.investopedia.com/terms/t/taxdeferred.asp) account.

This type of distribution can also occur in venture capital or private-equity settings when assets are transferred directly to investors instead of being [liquidated](https://www.investopedia.com/terms/l/liquidate.asp) for cash. Distributions in kind can sometimes help minimize capital-gains taxes because the recipient assumes the original cost basis of the transferred asset.

### Key Takeaways

*   A distribution-in-kind involves payments made in the form of securities or other property rather than cash.
*   Companies use distributions-in-kind to avoid capital gains tax and reduce tax liabilities.
*   Investors in tax-deferred accounts often prefer distributions-in-kind to minimize taxes.
*   In-kind distributions are common in venture capital and private equity to prevent capital gains tax.
*   Real estate and trust distributions-in-kind are subject to capital gains tax on property appreciation.

## How Distributions-in-Kind Work

Investors can invest in a company by buying bonds or stocks. Bonds pay investors a [return](https://www.investopedia.com/terms/r/return.asp) in the form of interest payments. Stocks pay investors a return in the form of [dividends](https://www.investopedia.com/terms/d/dividend.asp) and share price [appreciation](https://www.investopedia.com/terms/c/capitalappreciation.asp). A dividend or [share buyback](https://www.investopedia.com/articles/02/041702.asp) is a [distribution](https://www.investopedia.com/terms/d/distribution.asp) of cash to investors.

In general, companies that are doing well pay out healthy and growing dividends. These companies also buy back stock. Companies with declining earnings may be forced to buy back stock or pay dividends with borrowed funds. Another alternative is to distribute dividends-in-kind.

A distribution-in-kind may also be employed for tax reasons. Receiving appreciated property directly can sometimes lower your tax bill compared to selling it for cash.

Some funds deliver distributions-in-kind to investors after a certain threshold. If investors redeem shares beyond a threshold, they receive the rest as fund shares. The reason for doing this is to prevent large tax hits in the event of high redemption activity.

## Benefits of Choosing Distributions-in-Kind

In-kind distributions benefit both companies and investors in tax-deferred accounts by reducing taxes. Those who inherit shares usually get them in kind to reduce taxes. Investors with individual retirement plans can also take distributions-in-kind, such as for the [required minimum distributions](https://www.investopedia.com/terms/r/requiredminimumdistribution.asp) (RMDs) they have to take. This means people can take the actual stocks and bonds out of the account as a distribution without liquidating them.

> **Fast Fact**
>
> Distributions-in-kind can be used for an entire required minimum distribution (RMD). 

Investors who wish to keep fully invested accounts may find this to be a valuable option. In-kind distributions are beneficial for undervalued stocks that might increase significantly. This allows the investor to record the profit from share price appreciation as a [capital gain](https://www.investopedia.com/terms/c/capitalgain.asp) rather than as ordinary income, which is generally taxed at a higher rate.

In-kind distributions are also a favored method for distributing proceeds in the [venture capital](https://www.investopedia.com/terms/v/venturecapital.asp) and [private equity](https://www.investopedia.com/articles/financial-careers/09/private-equity.asp) fields. Instead of liquidating holdings and making cash distributions to limited partners, funds hand the investors equivalent securities to avoid capital gains tax on liquidated holdings.

## How Distributions-in-Kind Apply to Real Estate and Trusts

Distributions-in-kind for [real estate](https://www.investopedia.com/terms/r/realestate.asp) transactions may not be exempt from [capital gains tax](https://www.investopedia.com/taxes/capital-gains-tax-101/). The company or organization making an in-kind distribution of property instead of cash will still have to pay capital gains tax incurred by any appreciation in the property's price.

A similar case exists for transfers made to [estates](https://www.investopedia.com/terms/e/estateplanning.asp) or [trusts](https://www.investopedia.com/terms/t/trust.asp) by a [settlor](https://www.investopedia.com/terms/s/settlor.asp). Such transfers of assets are taxable, and so the settlor is required to report capital gains or losses (and the tax due, if any) on their income tax returns.

## What Is a Required Minimum Distribution?

A required minimum distribution (RMD) is the amount of money that you must withdraw from a retirement account each year after you reach a certain age: 72 or 73, depending on your birth year.

It is a rule established by the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) to ensure that the funds in your retirement account are being withdrawn, rather than kept in a tax-sheltered account indefinitely (as, for example, an eventual inheritance for your [heirs](https://www.investopedia.com/terms/h/heir.asp)). If you're 72 or 73 and still working, you can delay taking RMDs from your workplace plan, such as a 401(k), until you retire, unless you own 5% or more of the business that's sponsoring the retirement plan.

## How Does Capital Gains Tax Compare to Income Tax?

Capital gains taxes are typically lower than income taxes. The capital gains tax ranges from 0% to 20%, with a few exceptions: Some stocks and collectibles can be taxed at 28%, while real estate gains might reach 25%. [Income taxes](https://www.investopedia.com/terms/t/taxbracket.asp), on the other hand, go even higher, up to 37%. (The 2024 tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.)

## What's the Difference Between Dividends and Distributions?

Both dividends and distributions serve as [payouts](https://www.investopedia.com/terms/p/payout.asp) for investors. However, they're taxed differently. Dividends are with after-tax funds, whereas distributions are with before-tax funds.

## The Bottom Line

Not all distributions are made in cash; some are made in kind, meaning they're paid in securities or other property. Companies often use in-kind distributions, such as paying stock dividends, to reduce capital-gains liabilities.

Investors withdrawing from tax-deferred accounts also benefit from in-kind transfers to help minimize taxes. In addition to stock dividends, distributions-in-kind are common in venture capital, private equity, real estate, and trusts, though in the latter two, capital-gains tax may apply to any property appreciation.

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Retirement Plan and IRA Required Minimum Distributions FAQs](https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs)."