How does appraisal depreciation differ from accounting allocation?
Correct Answer
C) It measures supported loss in value, not scheduled cost allocation.
Appraisal accrued depreciation addresses the market-supported loss from cost new due to all relevant causes. Accounting depreciation allocates recorded cost under an accounting policy; book amount need not equal current value. Appraisal methods may use supported formulas, but are not governed by an owner’s tax schedule.
Why This Is the Correct Answer
Option C is correct because depreciation in an appraisal sense is a loss in value from any cause, supported by market evidence, while accounting depreciation is a scheduled allocation of recorded cost. The accountant's approach to and calculation of depreciation is quite different from the appraiser's.
Why the Other Options Are Wrong
Option A: It applies during the first five years after construction is done.
Option A is wrong because it limits appraisal depreciation to the first five years after construction. Appraisal depreciation is a loss in value from any cause and is not tied to a fixed time window.
Option B: It must equal the owner’s income tax depreciation charge each year.
Option B is wrong because it says appraisal depreciation must equal the owner's annual income tax depreciation charge. Tax depreciation is a cost allocation under tax rules, and appraisal depreciation is measured from market evidence.
Option D: It makes book value and market value identical at each date.
Option D is wrong because it claims appraisal depreciation makes book value and market value identical at each date. Book value reflects accounting allocations and need not equal current market value.
Market loss, not ledger entry
Appraisers measure lost value in the market; accountants record scheduled cost allocations in the ledger.
How to use: Use this contrast to reject answers that link appraisal depreciation to tax or book schedules.
Exam Tip
Choose the answer that describes depreciation as a supported loss in value; options tying it to tax schedules or book value describe accounting.
Common Mistakes to Avoid
- -Using the owner's tax depreciation as the appraisal depreciation
- -Assuming book value equals market value
- -Limiting depreciation to a fixed period after construction
Concept Deep Dive
Analysis
This question tests the difference between appraisal depreciation and accounting depreciation. Appraisal depreciation is a market-supported loss in value from any cause, measured from cost new. Accounting depreciation allocates recorded cost over time under an accounting or tax policy and need not track market value.
Background Knowledge
In appraisal, accrued depreciation is the difference between cost new and the improvement's contribution to value, arising from physical, functional or external causes. In accounting, depreciation spreads the recorded cost of an asset over its useful life under an accounting or tax policy. The two figures serve different purposes and often differ substantially.
Real-World Application
A commercial owner gives an appraiser a tax return showing the building nearly fully depreciated on the books. The appraiser instead estimates depreciation from market evidence and the building's actual condition, finding much less loss in value than the tax records suggest.
More Cost Approach Questions
Why can equivalent-utility replacement cost be useful for an obsolete improvement?
An appraiser estimates the current replacement cost new of the improvements at $890,000, accrued depreciation from all causes at $170,000, and land value at $325,000. All necessary cost components and depreciation are included in those amounts. What is the indicated property value?
Improvement cost new is $595,000. Separately supported improvement depreciation deductions of $48,000, $27,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $155,000, already reflecting any site losses. What total indicated value results?
What best supports a claimed loss from a bathroom-layout deficiency?
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Which scenario most strongly supports giving the cost approach substantial weight?
A cost total $650,000 explicitly includes $40,000 of non-realty FF&E outside the appraised real-property interest. Exclude it. Supported realty-only total depreciation is $55,000. Add site $200,000, with no overlap. What real-property cost indication results?
A 2,200-sf dwelling costs $200 per square foot, and a separate 400-sf garage costs $75 per square foot. These costs are complete and do not overlap. Both have an effective age of 15 years and a total life of 50 years, with straight-line depreciation and no salvage value. No site value or other loss is involved. What is the combined depreciated cost of the dwelling and garage?
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An external influence causes an annual net income loss of $9,600. The capitalization rate for the loss is 8%, and no other economic factors change. What is the indicated loss in value of the whole property, before allocation between site and improvements?
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