What it means
Most dividends are paid in cash, but a company is free to distribute other assets if its laws and constitution allow. A property dividend might be a block of shares in a subsidiary, a piece of real estate, or a stock of the company's own products.
The term covers any non-cash asset, not only real estate. Companies choose this route for several reasons.
They may be short of cash but rich in assets, they may want to separate a business unit by giving its shares directly to shareholders, or the owners of a private company may want to take a building out of the company and hold it personally. Under international accounting standards, the dividend is measured at the fair value of the assets given away.
Any difference between that fair value and the asset's carrying amount (its value in the company's books) is recorded as a gain or loss in profit before the dividend is booked. Rules differ in some countries, so local standards should be followed, and the accounting must recognise that a real asset is leaving the business.
Once declared, the company records a liability to shareholders, and when the asset is transferred the liability is cleared. The reduction in retained earnings equals the fair value of the distributed asset, even though no cash has left the bank.
Retained earnings must be sufficient, and creditors' interests must be protected, as for any dividend. The tax effects can be significant and vary by country.
The company may be treated as if it had sold the asset at market value, and shareholders may owe tax on the value they receive, so professional advice is needed before a property dividend is declared.
In practice
Real-world examples.
Example
A holding company owns 80% of a software subsidiary valued at $10,000,000. It distributes the subsidiary's shares to its shareholders as a property dividend, which separates the businesses without any cash leaving the group.
Example
A wine producer short of cash pays shareholders a dividend of 12 cases of wine each, which it records at the $1,800 fair value of each shareholder's allocation. It reports a profit on the difference between that and the production cost.
Example
The owner of a private company wants to hold the head office personally. The company declares the building, worth $2,400,000, as a dividend to him, and its accountants record a gain over the $1,500,000 carrying amount.
Formula
Calculation
The key calculations are the gain on distribution and the amount charged against retained earnings:
Gain or loss on distribution = Fair value of asset - Carrying amount of asset
Reduction in retained earnings = Fair value of asset distributed
Suppose a company decides to distribute a plot of land to its shareholders. The land is recorded in the books at $400,000 and has a fair value of $650,000.
Gain on distribution = $650,000 - $400,000 = $250,000, recorded in profit.
Dividend declared = $650,000, which reduces retained earnings by $650,000.
If there are 100 shareholders with equal holdings, each is entitled to a share valued at $6,500, normally dealt with through joint ownership or a sale of the land and distribution of the proceeds.Case study
Seen in the real world.
Kestrel Components is an illustrative, fictional manufacturer that owned a vacant warehouse it no longer needed. The warehouse was recorded at $800,000 in the books, but a valuer assessed its market value at $1,300,000.
The directors had little cash to spare for a dividend, so they proposed to give the warehouse to the shareholders in proportion to their holdings, through a jointly owned property vehicle. The finance director recorded a gain of $500,000 on the distribution and reduced retained earnings by $1,300,000.
The gain increased the company's taxable profit, and the finance director had not warned the board about this. They paid a tax bill that they would not have faced with a cash dividend. The illustrative lesson is that a non-cash dividend can still trigger real cash tax, so the tax effect should be modelled before it is approved.
Watch out
Common mistakes.
- Recording the dividend at the asset's book value instead of its fair value, which understates the amount distributed.
- Forgetting that the company may owe tax on the gain as though it had sold the asset.
- Assuming the board can distribute any asset it likes, when company law and the available retained earnings place limits on what can be paid.
Questions
People also ask.
Is a property dividend the same as a stock dividend?
No, a stock dividend gives shareholders extra shares of the company itself, while a property dividend gives them other assets such as land, goods or shares in a different company.
Do shareholders pay tax on a property dividend?
They usually do, based on the value of what they receive, but the rules differ by country, so they should seek local advice.
Why not pay cash instead?
A company may lack cash, may want to transfer a specific asset or business to its owners, or may wish to avoid selling the asset on the open market.
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