Property Dividend

Property Dividend
See also
Patronage Dividend Dividend Issued share capital Ownership interest Distribution In Kind Yield maintenance Cash and cash equivalents Treasury Stock Method Types of dividends

Property Dividend refers to an asset other than cash being distributed as the dividend. For example, the company may distribute inventory, fixed assets, or shares in another company that it holds. To declare a property dividend does not mean that a company does not have cash. A property dividend may be declared because the company is using its cash to finance an expansion or some other investment opportunity.

When a property dividend is declared, the company restates to fair value as of that date the property it will distribute and recognizes a gain or loss for the difference between the property's fair and carrying values.

Types of Dividend Payments

There are several types of dividend payments, including:

• Cash Dividends: Cash dividends are by far the most common type of dividend and will account for the vast majority of the dividend payments you receive. Cash dividends are simply a transfer of your share of a company's earnings to your brokerage account in the form of cash.
• Stock Dividends: Issuing of new shares of stock to existing shareholders is known as stock dividends. For example, you own 10,000 shares and the company decided to pay a 5% stock dividend, you would receive 500 new shares of the company.
• Property Dividends: Companies may issue non-monetary dividends to their shareholders. A property dividend could come in the form of physical assets such as inventories the company holds, or shares of a subsidiary company.
• Scrip Dividends: A company may issue a scrip dividend when it does not have enough money to make dividend payments. A scrip dividend is a promissory note to pay shareholders a cash dividend in the future.
• Liquidating Dividends: A liquidating dividend is a return of the capital that was originally contributed by shareholders. This type of dividend happened when a company is shutting down.

Property dividends- effect on the shareholder

When a corporation distributes property rather than cash to a shareholder, the amount distributed is measured by the fair market value of the property distribution. Ad with a cash distribution, the portion of a property distribution is a dividend, and any excess is treated as a return of capital. If the fair market value of the property distributed exceeds the corporation and the shareholder's basis in the stock investment, a capital gain usually results.

The amount distributed is reduced by any liabilities to which the distributed property is subject immediately before and immediately after the distribution and by any liabilities of the corporation assumed by the shareholder. The basis of the distributed property for the shareholders is the fair market value of the property on the date of this distribution.

Property dividends- effect on the corporation

All distributions of appreciated property generate gain to the distributing corporation. In effect, a corporation that distributes gain property is treated as if it had sold the property to the shareholder for its fair market value. However, the distributing corporation does not recognize loss on distributions of property.

If the distributed property is subject to a liability in excess of basis or the shareholder assumes such a liability, a special rule applies. For purposes of determining gain on the distribution, the fair market value of the property is treated as not being less than the amount the liability

Examples of Property Dividend

• Shares of another company: A company may distribute shares of another company that it holds as a property dividend. For example, if a company owns shares of Apple, it may declare a property dividend and distribute those Apple shares to its shareholders.
• Inventory: A company can also distribute inventory as a property dividend. For example, a company that manufactures electronics may declare a property dividend and distribute televisions, audio systems, etc. to its shareholders.
• Real Estate: A company can also distribute real estate as a property dividend. For example, a company may own a shopping mall and distribute it to its shareholders as a property dividend.
• Fixed Assets: Fixed assets such as buildings, machinery, equipment, etc. can also be distributed as a property dividend. For example, a company may own a factory and distribute it to its shareholders as a property dividend.

Advantages of Property Dividend

Property dividends can offer several advantages to companies and shareholders. They can provide an alternative to cash distributions, allowing a company to retain cash for other purposes such as expansion or investments. Additionally, they can also provide shareholders with an asset that may appreciate in value over time. The following are some of the advantages of property dividends:

• Property dividends provide companies with an alternative to cash distributions, allowing them to retain cash for other purposes.
• Property dividends can provide shareholders with an asset that may appreciate in value over time. This could create additional value for shareholders, as the asset may be worth more than the dividend amount at the time of distribution.
• Property dividends can be tailored to the needs of the company and the shareholders. For example, a company may decide to distribute a property dividend that is specific to the industry in which it operates, providing shareholders with a unique asset.
• Property dividends may be attractive to investors who are looking for a more diverse portfolio. By owning a variety of assets, investors may be able to reduce their risk while still earning a return on their investment.
• Property dividends can also be used as a form of tax planning. Depending on the type of asset distributed, a company may be able to take advantage of tax breaks or other incentives.

Limitations of Property Dividend

Property Dividend has some limitations which need to be taken into consideration before making a decision to declare one. These limitations are:

• The company needs to have sufficient assets to distribute. It is not possible to declare a property dividend if the company does not have the required assets to distribute.
• Property dividends need to be declared in a way that is fair to all shareholders. This means that all shareholders must receive the same amount of assets, or the same proportion of assets, for the dividend to be fair.
• Property dividends must be valued according to their fair market value. This can be difficult to determine as asset values can change over time.
• Property dividends are not as liquid as cash dividends and may take longer to convert into cash.
• Property dividends may not be tax efficient and may incur additional costs such as capital gains tax.
• Property dividends may involve additional risks to the shareholders, as the value of the assets distributed may be subject to market fluctuations.

Other approaches related to Property Dividend

Property Dividend is a form of dividend distribution that involves the distribution of an asset other than cash. Other approaches to dividend distribution include:

• Stock Dividend: This is a dividend distribution wherein the company distributes additional shares of its common or preferred stock to its shareholders. The number of shares issued is based on the number of shares the shareholder already owns.
• Cash Dividend: This is the most common form of dividend distribution where the company distributes cash to its shareholders. The amount of cash distributed is determined by the company's board of directors and is based on the company's profits and available cash reserves.
• Scrip Dividend: This is a dividend distribution where the company issues a promissory note to its shareholders instead of cash. These notes are redeemable for cash at a later date.
• Liquidating Dividend: This is a dividend distribution wherein the company distributes its assets to its shareholders in lieu of cash. This is usually done when a company is being dissolved or liquidated.

In summary, Property Dividend is one of the many forms of dividend distribution where the company distributes an asset other than cash. Other approaches to dividend distribution include Stock Dividend, Cash Dividend, Scrip Dividend, and Liquidating Dividend.

References

• Hoffman W., Raabe W., (2007). Corporations, Partnerships, Estates, and Trusts, Professional Edition Cengage Learning, Canada.
• Istomin A., (2018). Automatic Passive Income BPP Learning Media, London.
• Smith J.E., Raabe W.A., (2014). Essentials of Taxation Cengage Learning, Sydney.
• Zain M., (2018). Certified Management Accountant Zain Academy, New York.

Author: Emilia Trzeciecka