An improved property sold for a cash-equivalent $465,000. The supported depreciated contribution of its improvements is $340,000. Using extraction, with no other components or adjustments, what land value is indicated?
Correct Answer
A) $125,000
Separate the stated improvement contribution from the whole-property price: $465,000 − $340,000 = $125,000. This is an extraction/value-decomposition calculation. It is distinct from the income land-residual technique, which allocates and capitalizes net income.
Why This Is the Correct Answer
Option A is correct because extraction estimates land value by subtracting the improvements' contribution from total price: $465,000 − $340,000 = $125,000. No other components or adjustments apply.
Why the Other Options Are Wrong
Option B: $465,000
Option B, $465,000, is the whole-property sale price. It still includes the $340,000 improvement contribution, which must be removed to leave $125,000 for the land.
Option C: $340,000
Option C, $340,000, is the depreciated contribution of the improvements, not the land. Land is the remainder: $465,000 − $340,000 = $125,000.
Option D: $805,000
Option D, $805,000, adds the improvement contribution to the sale price: $465,000 + $340,000. Extraction subtracts it, giving $125,000.
Extract: take improvements out
To extract the land, take the improvements out of the price. What remains is the land value.
How to use: Use this phrase whenever a question gives a sale price and an improvement contribution.
Exam Tip
Extraction subtracts; allocation multiplies by a ratio. Identify which method the question describes.
Common Mistakes to Avoid
- -Adding improvement value to the sale price
- -Confusing extraction with the land residual technique
- -Using replacement cost new instead of depreciated contribution
Concept Deep Dive
Analysis
This question tests the extraction method of land valuation. Extraction subtracts the depreciated contribution of the improvements from the improved sale price to indicate land value. Distractors use the whole price, the improvement value, or their sum.
Background Knowledge
Extraction is useful when vacant land sales are scarce, particularly where improvements contribute little value. It depends on a reliable estimate of the improvements' depreciated contribution. It differs from the land residual technique, which works with income.
Real-World Application
In a rural area with few vacant land sales, an appraiser finds a sale of an older home with modest remaining value. She subtracts the home's estimated depreciated contribution from the price to indicate land value.
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