A property has a verified external loss of $30,000. Independent evidence allocates 25% of the loss to the site and 75% to the improvements. How much of the loss applies to the improvements?
Correct Answer
B) $22,500
30000×(1−0.25) = 22500. Common errors: applying the 25% site share instead of the 75% improvement share gives $7,500; assigning the whole loss to the improvements gives $30,000; dividing by 0.75 instead of multiplying gives $40,000.
Why This Is the Correct Answer
Option B is correct because $30,000 x (1 - 0.25) = $30,000 x 0.75 = $22,500. The independent allocation evidence assigns 75% of the loss to the improvements. The other 25% belongs to the site and is not deducted from the improvements.
Why the Other Options Are Wrong
Option A: $7,500
Option A is wrong because $7,500 applies the 25% site share instead of the 75% improvement share: $30,000 x 0.25 = $7,500. The improvement loss is $30,000 x 0.75 = $22,500.
Option C: $30,000
Option C is wrong because $30,000 assigns the whole loss to the improvements. The evidence gives only 75% to improvements, so the improvement loss is $22,500.
Option D: $40,000
Option D is wrong because $40,000 comes from dividing by 0.75 instead of multiplying: $30,000 / 0.75 = $40,000. The improvement share cannot exceed the whole loss; it is $30,000 x 0.75 = $22,500.
Take only the building's share
Multiply the total external loss by the improvements' percentage. A share of a loss is smaller than the whole loss.
How to use: Use this when a question splits an external loss between site and improvements.
Exam Tip
Check which percentage belongs to the improvements, and confirm your answer is less than the total loss.
Common Mistakes to Avoid
- -Applying the site share to the improvements
- -Deducting the whole external loss from the improvements
- -Dividing by the percentage instead of multiplying
Concept Deep Dive
Analysis
This question tests allocating a whole-property external loss between site and improvements. Independent evidence shows that 75% of the loss belongs to improvements. So the improvement share is $30,000 x 0.75 = $22,500.
Background Knowledge
External obsolescence often affects both the site and the improvements. When site value is estimated separately and already reflects its share of the external influence, only the improvement share is deducted from cost new, and that split should be supported by evidence.
Real-World Application
A new landfill nearby reduces a property's value by $30,000, and paired land and improved sales show 75% of that loss affects the improvements. The appraiser deducts $22,500 as external obsolescence from the improvements.
More Cost Approach Questions
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