Improvement cost new is $352,000. Separately supported improvement depreciation deductions of $44,000, $12,000, $9,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $120,000, already reflecting any site losses. What total indicated value results?
Correct Answer
B) $407,000
352000−(44000+12000+9000)+120000 = 407000. Common errors: leaving out the site value gives $287,000; deducting only the largest depreciation item gives $428,000; not deducting any depreciation gives $472,000.
Why This Is the Correct Answer
Option B is correct because total depreciation is the sum of the separate estimates: $44,000 + $12,000 + $9,000 = $65,000. Then $352,000 − $65,000 = $287,000 depreciated improvements, plus $120,000 site value equals $407,000.
Why the Other Options Are Wrong
Option A: $287,000
Option A, $287,000, is only the depreciated improvement value ($352,000 − $65,000). It leaves out the $120,000 site value; adding it gives $407,000.
Option C: $428,000
Option C, $428,000, deducts only the largest item ($352,000 − $44,000 + $120,000). The three deductions are nonoverlapping, so all $65,000 must be deducted: $352,000 − $65,000 + $120,000 = $407,000.
Option D: $472,000
Option D, $472,000, adds site value to cost new with no depreciation ($352,000 + $120,000). The supported $65,000 total depreciation must be subtracted, giving $407,000.
Cost minus loss plus land
Cost new, minus all supported depreciation added together, plus site value. Three steps, in that order.
How to use: Use this sequence to set up any cost approach total before you touch a calculator.
Exam Tip
When a question lists several depreciation amounts and says they do not overlap, add them all. Then check that the answer includes the site value if the question asks for a total indicated value.
Common Mistakes to Avoid
- -Forgetting to add the site value
- -Deducting only one of several depreciation items
- -Skipping the depreciation deduction entirely
Concept Deep Dive
Analysis
This question tests the cost approach formula with several separate depreciation items. Because the deductions are nonoverlapping, all of them are added together and subtracted from cost new. The depreciated improvement value is then added to the site value.
Background Knowledge
In the breakdown method, total depreciation equals the sum of the individual estimates of physical, functional and external depreciation. The cost approach indication is cost new less total depreciation, plus site value. Site value is estimated separately and should already reflect any losses attributable to the site.
Real-World Application
An appraiser estimates separate physical, functional and external depreciation for an older home and confirms none double counts another. The appraiser sums them, deducts the total from cost new and adds the site value to reach the cost approach indication.
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?
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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?
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Market evidence isolates a value loss because an undamaged one-car garage provides insufficient utility relative to competing properties. What is the cause?
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Market data show that an external influence causes an annual net income loss of $14,400 and indicate a 9% capitalization rate for the loss. Risk and growth do not change. What is the indicated loss to the whole property, before allocation between site and improvements?