What limitation applies to a simple aggregate market-extracted depreciation amount?
Correct Answer
A) It does not by itself separate the individual depreciation causes.
Simple market extraction gives the overall difference between compatible improvement cost new and extracted improvement contribution. Without additional analysis, it does not apportion physical, functional and external causes. It requires credible inputs and cash-equivalent transaction analysis, not necessarily tax records.
Why This Is the Correct Answer
Option A is correct because a simple aggregate market-extracted amount is one total that does not by itself separate individual depreciation causes. Measuring physical, functional and external items individually requires a different approach, such as the breakdown method. The extracted figure is useful as a total but needs additional analysis to apportion causes.
Why the Other Options Are Wrong
Option B: It cannot be used for any residential improvement.
Option B says market extraction cannot be used for any residential improvement. That is wrong; the method is commonly applied to residential properties when credible comparable sales and cost data exist.
Option C: It gives less depreciation than an age-life model.
Option C says market extraction gives less depreciation than an age-life model. There is no built-in relationship between the two; the extracted amount depends on the market data and can be higher or lower than an age-life estimate.
Option D: It requires the seller’s tax depreciation schedule as the answer.
Option D says the method requires the seller's tax depreciation schedule as the answer. Tax depreciation is an accounting concept, and market extraction relies on credible sale, site and cost data with cash-equivalent analysis, not tax records.
Extraction gives one lump
Market extraction hands you one lump of depreciation. To see what is inside the lump, you need the breakdown method.
How to use: Use this when a question asks what market extraction can or cannot tell you about depreciation causes.
Exam Tip
Contrast methods by what they produce: extraction and age-life give totals, while breakdown separates causes.
Common Mistakes to Avoid
- -Assuming market extraction identifies each depreciation cause
- -Using tax depreciation as market depreciation
- -Believing extraction is unusable for residential property
Concept Deep Dive
Analysis
This question tests the limits of the market extraction method of estimating depreciation. Simple market extraction yields one overall depreciation figure from the difference between cost new and the improvement contribution extracted from sales. Without further analysis, that lump sum does not tell the appraiser how much comes from physical, functional or external causes.
Background Knowledge
Market extraction estimates depreciation by subtracting site value from a comparable sale price to find the improvement contribution, then comparing it with cost new. The result reflects all forms of depreciation combined. The breakdown method, by contrast, measures physical, functional and external items individually.
Real-World Application
An appraiser extracts depreciation from three recent sales of similar homes and finds an overall rate per year of effective age. When the client asks how much of the loss comes from an outdated design, the appraiser explains that the extracted total alone does not answer that and further analysis would be needed.
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
The base unit cost for 4,000 sf of improvements is $150 per square foot, before a local cost multiplier of 1.10. After the multiplier, the cost covers all cost components. Total depreciation of the improvements is $99,000, and site value is $170,000. What value does the cost approach indicate?
Next Question
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?