Betterment tax is one of the taxes a seller might need to pay when selling real estate. This being so, the purchaser needs to make sure that the issue of this tax is addressed in the contract.
Betterment tax is levied on the owner of real estate when a change in the zoning of the town plan is approved that enhances the worth of the property. The tax is calculated by the municipality’s appraiser by appraising the worth of the enhancement and the tax is 50% of the enhancement.
What type of zoning or town plan changes can bring about Betterment tax?
The answer to this varies. If we are talking about residential property and there is a change in the town plan allowing additions to be built to the properties then Betterment tax will be incurred. If it is land zoned for agricultural purposes and it was changed to residential purposes this will incur Betterment tax. When a new town plan is approved for a new area to be developed then there will be Betterment tax.
This tax should not be confused with Capital Gains Tax that the seller pays on his profits from the sale of his real estate. However, in calculating the Capital Gains Tax, Betterment Tax can be factored in the calculation in order to lower the Capital Gains tax.
When is this tax paid?
The tax need not be paid immediately upon the change in town plan or zoning. It is paid once for each change in the town plan or the zoning. It is paid when the owner of the property endeavors to use the new town plan and asks for a building permit accordingly. If the owner did not take advantage of the new town plan then he will pay the Betterment tax when he sells the property.
It is therefore important for the lawyer representing the seller to check out whether this tax will apply to the transaction and if yes, how much can it be.
Why does the purchaser care?
In order to transfer title in any real estate transaction the land registry office requires confirmation from the municipality that there is no outstanding debt to municipal taxes. This means that the seller has paid the Betterment tax as well as other municipal taxes.
Therefor, if there is Betterment tax to be paid then the contract should provide that money from the last payment, will be held in escrow by the sellers’ lawyer until the tax is paid and the confirmation from the municipality necessary for the registration of title in the name of the purchaser is issued.
If the seller has lived in the property more than four years, he can get an exemption from the tax for the amount of the addition he can build that is up till 140 square meters.
After receiving the calculation of the tax it is wise to show the calculation to your own appraiser. Very often the tax can be lowered by appealing the calculation of the municipality’s appraiser.
In properties that have existed for many years you very often find that over this time several changes in the town plan and zoning have taken place. This can mean that the betterment tax can come to quite a large sum. It is therefore very important to find out before the deal is signed whether or not there is indeed Betterment tax and how much it can come to.