An improved property sold for a cash-equivalent $710,000. The supported depreciated contribution of its improvements is $435,000. Using extraction, with no other components or adjustments, what land value is indicated?
Correct Answer
A) $275,000
Separate the stated improvement contribution from the whole-property price: $710,000 − $435,000 = $275,000. This is an extraction/value-decomposition calculation. It is distinct from the income land-residual technique, which allocates and capitalizes net income.
Why This Is the Correct Answer
Option A is correct because $710,000 - $435,000 = $275,000. Extraction estimates land value by subtracting the value contribution of the improvements from the total property value. No other components or adjustments apply.
Why the Other Options Are Wrong
Option B: $710,000
Option B, $710,000, is the whole-property sale price, including the improvements. The land alone is $710,000 - $435,000 = $275,000.
Option C: $435,000
Option C, $435,000, is the improvement contribution, not the land. Subtracting it from the sale price gives $710,000 - $435,000 = $275,000.
Option D: $1,145,000
Option D, $1,145,000, adds the figures: $710,000 + $435,000. Extraction subtracts the improvement contribution, so land is $275,000.
Whole minus building equals land
Picture the sale as a pie: take out the building's slice and what remains is the land.
How to use: Use this when a question gives total sale price and improvement contribution.
Exam Tip
Watch for answer choices that simply repeat the given figures or add them together.
Common Mistakes to Avoid
- -Adding the improvement contribution instead of subtracting it
- -Reporting the total sale price as land value
- -Confusing extraction with the income land-residual technique
Concept Deep Dive
Analysis
This question tests the extraction method in its simplest form. When the depreciated improvement contribution is given, subtract it from the improved sale price to isolate land value. The distractors repeat a given figure or add instead of subtract.
Background Knowledge
Extraction separates an improved sale into land and improvement components. It is most reliable when improvements contribute a small share of value or their depreciated contribution can be well supported. It differs from the income land-residual technique, which works with net income and capitalization rates.
Real-World Application
An appraiser finds an older house in a built-up area where vacant lots rarely sell. After estimating the house's depreciated contribution, the appraiser subtracts it from the sale price to extract a land indication.
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