Fuzzy

Chapter 12

Estimating Loss in Value: Accrued Depreciation

STUDENT LEARNING OUTCOMEs

A lesson in accrued depreciation should cover the following topics:

12.1 Depreciation Defined

12.2 Types and Causes of Accrued Depreciation

12.3 Methods of Measuring Accrued Depreciation

12.4 Cost Approach Summary

Class Activities

[Instructor: Complete as needed.]

Lecture [ ] Discussion [ ] Breakout Groups [ ] Other _____________ [ ]

12.1 DEPRECIATION DEFINED

Depreciation is both an accounting term and an appraisal term.

Depreciation as Used in Accounting

• Depreciation assumes a gradual “wasting away” of the value of an asset.

• In accounting, it is a bookkeeping expense, or an allowable deduction from income in the calculation of income taxes.

• For real estate, accounting depreciation is allowed only on the improvements.

• It is usually calculated on the historical acquisition cost, or “cost basis” of the improvements.

Example 12.1 Accounting Depreciation

Purchase price: $275,000

Less: Land value - 65,000

Equals: Building cost basis $210,000

Divided by: Depreciation period ÷ 40 years

Equals: Annual depreciation $ 5,250

Accrued Depreciation in Appraisals

• Depreciation is deducted from reproduction or replacement cost new on the date of value, rather than historical cost.

• The amount deducted is the appraiser’s best estimate of the actual loss in market value.

• Depreciation is the difference between the cost new of the improvements and their market value, as of the valuation date. This difference is also referred to as diminished utility.

Purposes of Depreciation Estimates in Appraisals

Cost Approach — To estimate the value contribution of the improvements.

1. Depreciated improvement value is added to the land value.

2. Total property value by the cost approach is the result.

3. The exact amounts...