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?
Correct Answer
B) $755,000
650000−40000−55000+200000 = 755000. Common errors: not excluding the $40,000 of non-realty FF&E gives $795,000; leaving out the realty depreciation gives $810,000; leaving out the site value gives $555,000.
Why This Is the Correct Answer
Option B is correct because the $40,000 of non-realty FF&E must be excluded, leaving $610,000 of realty cost. Deducting $55,000 of realty depreciation gives $555,000, and adding the $200,000 site gives $755,000.
Why the Other Options Are Wrong
Option A: $555,000
Option A, $555,000, is wrong because it stops after excluding FF&E and deducting depreciation ($650,000 - $40,000 - $55,000) and leaves out the $200,000 site. Adding the site gives $755,000.
Option C: $795,000
Option C, $795,000, is wrong because it keeps the $40,000 of non-realty FF&E in the cost ($650,000 - $55,000 + $200,000). Excluding it gives $755,000.
Option D: $810,000
Option D, $810,000, is wrong because it omits the $55,000 depreciation ($650,000 - $40,000 + $200,000). Deducting it gives $755,000.
Strip personal property first
Take out anything that is not real estate before you depreciate and add land.
How to use: Use this whenever a cost or price figure includes furniture, fixtures or equipment that are not realty.
Exam Tip
Check whether a cost figure includes non-realty items; if the question says to exclude them, do so before other steps.
Common Mistakes to Avoid
- -Leaving non-realty FF&E in the real-property cost
- -Omitting the depreciation deduction
- -Forgetting to add site value
Concept Deep Dive
Analysis
This question tests removing non-realty items before reaching a real-property value. The $650,000 cost includes $40,000 of FF&E that is not part of the real property, so the realty cost is $610,000. Subtracting $55,000 depreciation and adding the $200,000 site gives $755,000.
Background Knowledge
Furniture, fixtures and equipment that are personal property are not part of the real property interest being appraised. Their value must be removed so the cost approach reflects only the real estate, with depreciation measured on that realty and site value added.
Real-World Application
An appraiser valuing a newly built furnished vacation rental house receives a total cost that includes beds, furniture and freestanding appliances. The appraiser removes those personal property costs so the cost approach reflects only the real property.
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Previous Question
A 2,400-sf dwelling has a current cost new of $185 per square foot. Total depreciation of the improvements is estimated at $52,000, and the site value is $115,000. The cost figure covers all cost components without overlap. What is the indicated value by the cost approach?
Next Question
Total improvement cost new is $500,000, including short-lived components $70,000 with separately supported loss $30,000. Apply 22% physical loss only to remaining long-lived cost. No other physical loss applies. What total physical depreciation results?