A functional defect is economically incurable under a verified cost-benefit analysis. What supports its depreciation allowance?
Correct Answer
C) The supported value loss caused by the defect, without overlap.
An incurable functional deficiency is measured by supported value loss rather than automatically by an uneconomic repair invoice or historical cost. Controlled market evidence or compatible income analysis can inform it. Curable functional deductions also depend on the chosen cost base and possible overlap.
Why This Is the Correct Answer
Option C is correct because an incurable functional defect is measured by the value loss it causes, supported by market or income evidence. The cost to cure technique cannot measure incurable functional obsolescence, and the loss must not overlap other deductions.
Why the Other Options Are Wrong
Option A: The full cost of the uneconomic cure, as a direct deduction.
Option A uses the full cost of the uneconomic cure as a direct deduction. Because the cure costs more than the benefit, its cost overstates the loss and does not measure incurable functional obsolescence.
Option B: The original element’s historical cost, as recorded.
Option B uses the original element's recorded historical cost. Historical cost reflects a past date and says nothing about the current value loss the defect causes.
Option D: A standard percentage of cost new for the property type.
Option D applies a standard percentage of cost new for the property type. A generic percentage is not evidence of the specific loss this defect causes in the subject's market.
Incurable Means Measure the Loss
If fixing it costs more than it is worth, measure what the market takes off for the defect, not the repair bill.
How to use: Use this whenever a question labels a defect incurable.
Exam Tip
For incurable items, prefer answers based on market-supported value loss over cost-based measures.
Common Mistakes to Avoid
- -Using cost to cure for an incurable item
- -Relying on historical cost for a current loss
- -Applying a blanket percentage instead of market evidence
Concept Deep Dive
Analysis
This question tests how incurable functional obsolescence is measured. When the cure costs more than the benefit, the cost to cure is not the measure of loss. Instead, the supported loss in value caused by the defect is used, without overlapping other deductions.
Background Knowledge
Functional obsolescence is incurable when the cost to correct the deficiency is greater than the resulting economic benefit. The cost to cure technique cannot measure incurable functional or external obsolescence. Such losses are typically measured with paired sales or capitalization of a rent loss.
Real-World Application
A house has a bedroom reachable only through another bedroom, and rebuilding the layout would cost far more than the gain. The appraiser uses paired sales of homes with and without that layout to measure the loss.
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?
Improvement cost new is $1,850,000. Separately supported improvement depreciation deductions of $310,000, $620,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
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?
A new feature in the improvements has a current cost of $45,000 and a market contribution of $18,000. The entire difference is due to superadequacy, with no physical or external loss and no overlap. What is the loss from the superadequacy?
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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Previous Question
Direct and indirect improvement costs including contractor overhead/profit total $475,000, explicitly excluding entrepreneurial incentive. Separate supported incentive is 12% of that base. What full improvement cost new results?
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Improvements totaling 2,450 square feet have a current cost new of $210 per square foot, an effective age of 14 years and a total economic life of 70 years. There is no salvage value and no other depreciation. What is the depreciated cost of the improvements by the straight-line age-life method, excluding the site?