When using the cost approach for valuation, what must be subtracted from the replacement cost of improvements?
Correct Answer
A) Depreciation
In the cost approach, depreciation (physical deterioration, functional obsolescence, and economic obsolescence) must be subtracted from the replacement cost of improvements to arrive at the depreciated value of the building.
Why This Is the Correct Answer
Depreciation must be subtracted from replacement cost because buildings lose value over time through three types of deterioration: physical (wear and tear), functional (outdated features), and economic (external factors). The cost approach formula is: Land Value + (Replacement Cost of Improvements - Depreciation) = Property Value. This reflects the reality that a building constructed years ago, even if replaced today, would not have the same value as a brand new structure due to accumulated depreciation from use, obsolescence, and changing market conditions.
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