To extract total improvement depreciation from an improved sale and current cost new, which listed allocation input is needed independently?
Correct Answer
D) Supported site value as of the comparable sale.
Land value at the comparable’s sale date is needed to isolate improvement contribution; compatible cost new is independently needed as well. Sale-financing conditions may affect cash-equivalent price and must be analyzed, though loan terms are not the site estimate. Tax basis or an old construction invoice is not a substitute.
Why This Is the Correct Answer
Option D is correct because market extraction subtracts the site value as of the comparable's sale date from the sale price to find the depreciated improvement contribution. That contribution is then subtracted from current cost new to estimate total depreciation, so a supported site value is a required independent input.
Why the Other Options Are Wrong
Option A: The seller’s income-tax basis as a substitute for land value.
Option A, the seller's income-tax basis as a substitute for land value, is wrong because tax basis reflects past costs and tax accounting, not the market value of the site at the sale date.
Option B: The old construction invoice as a substitute for current cost new.
Option B, an old construction invoice as a substitute for current cost new, is wrong because a historical invoice reflects past prices. Market extraction compares the improvement contribution with current cost new.
Option C: A loan balance as a substitute for site value.
Option C, a loan balance as a substitute for site value, is wrong because a loan balance measures debt, not land value. Financing terms may affect the cash-equivalent price, but they are not a site estimate.
Price minus land, then compare
Sale price minus land gives the building's contribution. Cost new minus that contribution gives depreciation.
How to use: Use this two-step chain to identify which inputs market extraction requires.
Exam Tip
Answer choices that offer a substitute from tax, accounting or loan records are usually not market measures of value or cost. Look for the input supported by market evidence as of the sale date.
Common Mistakes to Avoid
- -Using a historical construction cost instead of current cost new
- -Using a mortgage balance or tax basis in place of site value
- -Using current site value instead of site value as of the sale date
Concept Deep Dive
Analysis
This question tests the market extraction method of estimating depreciation. To isolate what the improvements contributed to a sale price, the appraiser must subtract a supported site value as of the sale date. The other options offer substitutes that do not measure land or current cost.
Background Knowledge
Market extraction (the sales comparison or market method of depreciation) starts with a cash-equivalent sale price and subtracts the site value as of the sale date. The remainder is the depreciated value of the improvements, which is compared with current cost new; the difference is total depreciation. Each input must be independently supported and as of the right date.
Real-World Application
To extract depreciation from a recent sale of a similar older home, an appraiser uses vacant lot sales to estimate the comparable's site value at its sale date. Subtracting that from the price isolates the improvements' contribution for comparison with current cost new.
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 cost new of the improvements is $310,000, and they have depreciated 20% of that cost. The site value of $88,000 already reflects any site influences. What is the indicated value by the cost approach?
Next Question
The improvements have a cost new of $700,000. A $20,000 cure allowance comes off cost new first, and remaining physical depreciation of 15% applies to the cost left after the cure allowance. These deductions do not overlap. The site value is $160,000. What is the indicated value by the cost approach?