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A betterment is pretty much exactly what it sounds like: The term refers to an improvement made to an asset that enhances its value, or makes it “better.” In real estate parlance, betterments are improvements to a property or to surrounding infrastructure that boost the value of the property.
What is a betterment?
There’s an important distinction between a betterment and what is considered just normal repair and maintenance. Refinishing floors or fixing a plumbing problem, for example, are not considered betterments because they simply sustain the existing value of a home. Betterments, on the other hand, add something new to a property that materially increases its value, like building a new sunroom or expanding the size of the kitchen. Here’s another example:
- Normal maintenance: repainting a bedroom and replacing its cracked window
- Betterment: adding a third bedroom to a home that previously had only two
Infrastructure projects undertaken by a city or state government are called public betterments. They increase the quality of life in the area for all property owners in the area, not just one. Here’s a simple way to think about the difference:
- Normal maintenance: repairing existing sidewalks or regularly repaving roads
- Betterments: building a new park or installing street lights where there were none before
In some states and municipalities, the cost of public betterments is covered by property taxes. If a city would like to add new public parking facilities or build a new school, it might impose a one-time betterment assessment on homeowners to fund the project.
Typically, betterment assessments cannot be deducted from income tax the way taxes for repair projects can be. Homeowners capture the added value from betterments in the amount they increase the value of a home.
Here are two examples of betterment at work both for commercial and residential real estate.
Residential real estate
Residential betterments are typically made by homeowners. For example, the Johnson family decides to add an in-law suite to their home to care for their aging parents. They get all of their building permits approved, hire a contractor and build the addition. They later receive a property tax increase notice in the mail. The betterment has increased their home’s taxable value, and they’ll now have to pay more in taxes.
Commercial real estate
Commercial real estate betterments are frequently a bone of contention when a property is damaged by weather or fire, due to insurance adjustments. Let’s say Jim owns a warehouse valued at $1 million and rents it out to a tenant. The tenant makes $500,000 in improvements to the building. When a hurricane causes severe damage, Jim is surprised to find that the loss settlement incurred a large coinsurance penalty. The insurance adjuster explains that the tenant’s betterments increased the value of the property beyond the value of the $1 million insurance policy, requiring coinsurance payments.
A betterment in real estate is something that adds substantial value to your property in a tangible way. And while increasing your home’s value is obviously a good thing, betterments can have tax and/or insurance implications, so be sure to do your homework before undertaking one.