Depreciation

Depreciation is the loss of value of real property due to all causes.

• Used in the cost approach to value
• Refers to loss in market value, not tax depreciation
• Applies to improvements, not land
• May be curable or incurable

• Physical Deterioration
  • Wear and tear from use or age
  • Examples: roof wear, peeling paint

• Functional Obsolescence
  • Loss of value from outdated design or features
  • Examples: poor floor plan, outdated systems

• External (Economic) Obsolescence
  • Loss of value from outside influences
  • Examples: nearby freeway, zoning changes
  • Almost always incurable

• Curable
  • Cost to fix is less than value added
  • Example: replacing worn carpet

• Incurable
  • Cost to fix exceeds value added
  • Example: proximity to industrial site

• Depreciation is subtracted from replacement cost
• Formula: Replacement Cost − Depreciation + Land Value

• Land does not depreciate
• External obsolescence is never owner-caused