Property ValuationIntermediateCalifornia Exam

What does 'depreciation' mean in the context of real estate appraisal?

AThe annual tax deduction allowed by the IRS for investment properties
BAny loss in value from any cause, reducing the property below its replacement cost newCorrect
CThe physical wearing out of a building over time only
DA reduction in the loan balance as mortgage payments are made

Why Any loss in value from any cause, reducing the property below its replacement cost new Is Correct

Answer B: Any loss in value from any cause, reducing the property below its replacement cost new

In appraisal, depreciation means any loss in value from any cause — physical deterioration, functional obsolescence, or external obsolescence. It is NOT limited to tax depreciation (which is a bookkeeping concept) or to physical wear alone.

Exam Tip: Property Valuation

Valuation questions focus on the three approaches to value: sales comparison, cost, and income. Know which approach is best for which property type. The income approach uses cap rate and NOI — memorize these formulas.

Key Property Valuation Terms in This Question

Appraisal

A professional estimate of a property's market value prepared by a licensed or certified appraiser.

Depreciation

A reduction in the value of an improvement (building) over time due to physical deterioration, functional obsolescence, or external factors.

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