The cost approach formula is: Value = Replacement or Reproduction Cost - Accumulated Depreciation + Land Value. Accumulated depreciation includes three types: physical deterioration (wear and tear), functional obsolescence (outdated design), and external/economic obsolescence (negative factors outside the property). Land value is estimated separately because land does not depreciate.
An appraiser determines that a 20-year-old warehouse would cost $500,000 to replace. Accumulated depreciation is $150,000. The land is valued at $120,000. Property value = $500,000 - $150,000 + $120,000 = $470,000.
Know the formula: Cost New minus Depreciation plus Land Value. Remember the three types of depreciation—physical deterioration, functional obsolescence, and external obsolescence. External obsolescence is the only type that is always incurable and is never the property owner's fault.
Related Terms
Related Concepts
A transfer tax is a tax imposed on the transfer of ownership of real estate.
Various programs and exemptions exist to reduce the property tax burden for specific groups, such as seniors, homesteaders, or veterans.
Depreciation is an accounting method of allocating the cost of an asset over its useful life, allowing investors to deduct a portion of the asset's cost each year.
Many states have laws to limit how much property taxes can increase each year, regardless of market value fluctuations.
Homestead portability allows homeowners to transfer a portion of their accumulated homestead tax savings to a new homestead in the same state.
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