What is Unearned Increment?
Unearned increment is the increase in value of real estate not directly attributed to the owner’s efforts. It typically arises from factors like urban development, infrastructural improvements, and population growth.
Real-World Example: Murphy’s Windfall
Consider Murphy, who buys a tract of land in the county for $20,000 per acre. As the years pass, the city’s population grows, leading to development and the extension of paved highways into the surrounding county where Murphy’s land is situated. Subsequently, Murphy decides to sell and fetches $50,000 per acre. This translates into an unearned increment of $30,000 per acre—reducing the windfall purely to external factors and general economic growth.
Why Understanding Unearned Increment is Crucial
Unearned increments can significantly impact real estate investments, either boosting profits or informing sound purchasing decisions. By grasping this concept, you can strategically invest in rapidly developing areas to benefit from potential unearned increments.
Frequently Asked Questions (FAQs)
Q: How can I identify areas with high unearned increment potential?
A: Look for regions undergoing rapid urban development, infrastructural upgrades, or zones marked for future expansion or population influx.
Q: Is unearned increment taxed?
A: Yes, unearned increments are usually subject to capital gains tax when the property is sold.
Q: Does the owner’s role have any effect on unearned increment?
A: Generally, the unearned increment is independent of the owner’s efforts and is mostly due to external factors like community development or demographic changes.
Q: Can unearned increments affect residential properties?
A: Absolutely. Residential properties can also see unearned increments based on similar external factors like neighborhood enhancement or new public amenities.
Related Terms: market value, appreciation, capital gain, urban sprawl, land development.
