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This study distinguishes between three types of social distance in assessing their impact on residents’ sense of both cognitive social capital (measured as cohesion and neighborhood attachment) and structural social capital (measured as general neighboring). We measure 1) structural social distance based on the ethnic differences between residents in a neighborhood; 2) perceptual social distance based on residents’ over-assessment of the presence of ethnic minorities in the neighborhood; and 3) observed social distance based on the extent to which social ties in a neighborhood are more likely to form between members of the same ethnic group than expected by chance (measured both at the individual and neighborhood level). Using a sample of residents nested in neighborhood in Brisbane, Australia, the results show that residents with higher perceptual social distance report lower levels of social capital in the neighborhood. Residents who report either more or fewer ties with members of the other ethnic group than expected by chance report lower levels of social capital, whereas neighborhoods with higher levels of observed social distance report lower levels of social capital. The results suggest that whereas structural social distance is important, how it affects residents’ perceptions and actual social ties is crucial for understanding why some neighborhoods have higher levels of social capital than others.