valuation

depreciation

In appraisal, depreciation is any loss in a property's value from its cost new. It has three forms: physical deterioration from wear and tear, functional obsolescence from outdated design or features, and external obsolescence from factors outside the property, such as nearby noise or a weak economy. Only improvements depreciate; land does not. Depreciation for tax purposes is a separate accounting concept.

Exam tip: External obsolescence is almost always incurable because it is off-site. Land does not depreciate in appraisal or tax calculations.
Example: A home with a cost new of $300,000 suffers $30,000 of worn roofing and $20,000 from a poor floor plan, for total depreciation of $50,000.

1. An investor buys a rental house for $350,000; the land is valued at $75,000. Using straight-line depreciation over 27.5 years, the annual depreciation deduction is:

Answer & explanation

Answer: C. Only the building depreciates: $350,000 - $75,000 = $275,000; $275,000 / 27.5 = $10,000. Using the full price gives $12,727 (wrong).

Related terms & state variants

cost approach external obsolescence functional obsolescence physical deterioration straight-line depreciation

Sources

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Last verified: 2026-10-23