Improvement cost new is $1,800,000. Separately supported improvement depreciation deductions of $200,000, $150,000, $100,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
Correct Answer
A) $1,350,000
1800000−(200000+150000+100000)+0 = 1350000. Common errors: deducting only the first depreciation item gives $1,600,000; not deducting any depreciation gives $1,800,000; leaving out the $100,000 item gives $1,450,000.
Why This Is the Correct Answer
Option A is correct because total depreciation is $200,000 + $150,000 + $100,000 = $450,000, and $1,800,000 − $450,000 = $1,350,000. Total depreciation is determined by adding together all the individual estimates, and no site value is added here.
Why the Other Options Are Wrong
Option B: $1,450,000
Option B is wrong because $1,450,000 is $1,800,000 − ($200,000 + $150,000), which leaves out the $100,000 item. Deducting all three items gives $1,350,000.
Option C: $1,600,000
Option C is wrong because $1,600,000 is $1,800,000 − $200,000, deducting only the first depreciation item. Deducting all $450,000 gives $1,350,000.
Option D: $1,800,000
Option D is wrong because $1,800,000 is the cost new with no depreciation deducted. Subtracting the $450,000 total gives $1,350,000.
Sum the losses, then subtract
Add each separate nonoverlapping depreciation item first, then subtract the total from cost new.
How to use: Use this step order whenever a question lists several separate depreciation deductions.
Exam Tip
Count the depreciation items in the stem and make sure your total includes each one; distractors often drop one item.
Common Mistakes to Avoid
- -Deducting only the first depreciation item
- -Leaving out one of several stated deductions
- -Reporting cost new with no depreciation deducted
Concept Deep Dive
Analysis
This question tests deducting several separately supported depreciation items from cost new. Because the items are expressly nonoverlapping and not already excluded, they are added together and subtracted in full. No site is included, so the answer is the depreciated improvement amount.
Background Knowledge
In the breakdown method, accrued depreciation is separated into physical, functional and external components, each estimated individually. The total depreciation is the sum of those estimates, provided they do not overlap. The depreciated improvement cost is cost new less total depreciation.
Real-World Application
An appraiser valuing an older house separately supports deductions for deferred maintenance, an outdated floor plan and a weak local market. The appraiser sums the three amounts and subtracts the total from replacement cost new to report the depreciated improvement value.
More Cost Approach Questions
An undamaged but functionally inadequate system causes a supported $60,000 loss. Replacement costs $85,000 and restores only $60,000, with no other benefits. What loss classification and deduction fit?
The subject is a 10-year-old dwelling with improvement cost new of $640,000. A highly comparable 7-year-old dwelling recently sold for $580,000; at the sale date its site was worth $150,000 and its improvement cost new was $500,000. Market evidence shows depreciation accruing evenly with actual age. What is the depreciated value of the subject improvements?
Observed sale prices are $450,000, $475,000, $425,000, $500,000, $440,000. Calculate the range (maximum−minimum), to the nearest dollar.
Observed values are 100, 105, 110, 115, 120. Calculate the range (maximum−minimum).
For an arithmetic illustration only, depreciate a historical $2,000,000 construction cost on a zero-salvage straight-line 40-year schedule for 10 years. What unindexed scheduled amount remains? This is not a conclusion of current market value or current replacement cost.
For an arithmetic illustration, allocate historical construction cost $2,400,000 over 40 years on a zero-salvage equal annual schedule. After 8 years, what scheduled unindexed amount remains? This is not a current market-value conclusion.
For an arithmetic schedule only, allocate historical cost $2,500,000 over 40 years with zero residual. After 8 years, what unindexed scheduled amount remains? This is not an estimate of current market value.
The sale-price range is $45,000 and the maximum is $385,000. Find the minimum price.
A property is purchased for $1,500,000 with a loan of $1,200,000. Using the purchase price as the value, what is the loan-to-value ratio, as a percentage to one decimal?
Improvement cost new is $500,000. Separately supported improvement depreciation deductions of $125,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Income Approach
8.2% of exam
Related Tools
Previous Question
An appraiser is developing an overall rate from market financing. Debt funds 75% of value at an annual mortgage constant of 6.5%, and the remaining equity has a current annual dividend rate of 12%. What overall rate does the band of investment indicate?
Next Question
Market evidence supports a 10% downward condition adjustment based on the comparable’s cash-equivalent $400,000 price. Apply only that supported difference. What adjusted price results?