Depreciation

Depreciation in Real Estate ## What Is Depreciation? In real estate appraisal, depreciation is a loss in value from any cause — not merely wear and tear, and not the accounting concept of depreciation used for tax purposes. Appraisers use it specifically in the cost approach to estimate the difference between what a building would cost to build new today (replacement cost) and what the existing building is actually worth given its current condition, design, and location. Accrued depreciation = Replacement Cost New − Depreciated Value of Improvements The land is never depreciated — land is assumed to hold its value indefinitely. Only the improvements (structures) depreciate. There are three types of depreciation, organized by cause: 1. Physical deterioration — caused by wear, age, and deferred maintenance 2. Functional obsolescence — caused by poor design, outdated features, or over-improvement 3. Economic (external) obsolescence — caused by forces outside the property --- ## Physical Deterioration Physical deterioration is the most intuitive form of depreciation — the literal wearing out of a building and its components. It results from: - Normal aging and use (roof shingles wearing thin, paint fading, HVAC systems aging) - Deferred maintenance (roof leaks not repaired, foundation cracks ignored) - Physical damage (earthquake damage, fire damage, flood damage) Physical deterioration is classified as either curable or incurable: ### Curable Physical Deterioration Curable means it is economically feasible to repair — the cost to fix the item is less than (or equal to) the value the repair adds. The item needs fixing, and fixing it makes financial sense. Examples: - Worn carpet that needs replacement - Peeling exterior paint - Broken window panes - Minor plumbing leaks **California…