Property ValuationIntermediateNorth Carolina Exam

Depreciation in the cost approach to real estate valuation refers to:

ALoss in value from any causeCorrect

BThe IRS schedule for tax deductions on investment property

CPhysical deterioration only

DIncrease in property taxes

Why Loss in value from any cause Is Correct

Answer A: Loss in value from any cause

In appraisal, depreciation is loss in value from any cause: physical deterioration, functional obsolescence, or external (economic) obsolescence.

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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Key Terms to Know

Depreciation

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

Appraisal

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

1031 Exchange

A tax-deferred exchange allowing investors to sell one investment property and reinvest proceeds in a like-kind property while deferring capital gains taxes.

Capitalization Rate (Cap Rate)

A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.