Unearned Increment

Unearned Increment in Real Estate

Unearned Increment is an increase in the value of real estate that occurs without any effort or investment from the property owner. It generally arises due to external factors like changes in population, infrastructure improvements, or economic developments in the area. The value appreciation is termed “unearned” as the owner benefits without adding any intrinsic value to the property.

Examples of Unearned Increment

1. Urban Expansion:

   • John purchases a rural property for $10,000 per acre. Over a decade, nearby urban development, such as shopping malls and residential neighborhoods, makes the land more valuable. John’s property value increases to $60,000 per acre without any action on his part.

2. Infrastructure Development:

   • Murphy buys a tract of land in an undeveloped county area for $20,000 per acre. As the city expands, paved highways are extended to Murphy’s land, and the county develops commercially and residentially. Murphy’s property then sells for $50,000 per acre, resulting in an unearned increment of $30,000 per acre.

Frequently Asked Questions (FAQs)

Q: What causes unearned increment?

• A: Unearned increment is primarily caused by external factors such as population growth, infrastructure development (e.g., highways, schools), economic developments in the area, zoning changes, and urban sprawl.

Q: Can owners influence unearned increment?

• A: No, unearned increment occurs independently of any effort by the property owner. It is due to broader economic and societal changes.

Q: Does unearned increment affect property taxes?

• A: Yes, an increase in property value often leads to higher property taxes, reflecting the property’s increased market value.

Q: Is unearned increment considered capital gain?

• A: Yes, any profit realized from the sale of property that includes an unearned increment is treated as a capital gain and is subject to capital gains tax.

Q: Can zoning changes contribute to unearned increment?

• A: Absolutely, zoning changes can significantly increase the value of property by allowing more or different types of development.

Related Terms

• Capital Gain:

  • The profit from the sale of an asset such as real estate, which includes any unearned increment.

• Appreciation:

  • The general increase in the value of property over time, which may include both earned and unearned increments.

• Zoning:

  • Regulations governing how the land in a region can be used, which can significantly impact property value.

• Land Value:

  • The worth of a plot of land, which can increase due to various factors including unearned increment.

Online Resources

• Investopedia: Real Estate Definitions
• National Association of Realtors (NAR)
• The Appraisal Institute

References

1. Fisher, Jeffrey A. “Real Estate Finance and Investments.” McGraw-Hill Education, 2017.
2. Geltner, David M., et al. “Commercial Real Estate Analysis and Investments.” South-Western Educational Pub, 2013.

Suggested Books for Further Studies

• “Real Estate Finance & Investments” by William Brueggeman and Jeffrey Fisher:

  • This book covers real estate finance fundamentals, including the impacts of unearned increment on property value.

• “The Economics of Real Estate” by Michael Ball, Colin Lizieri, and Bryan D. MacGregor:

  • Provides a deeper understanding of economic factors affecting real estate, including external influences like unearned increment.

Real Estate Basics: Unearned Increment Fundamentals Quiz