Property Valuation
A loss in property value due to physical deterioration, functional obsolescence, or external factors.
In appraisal, depreciation is any condition that reduces value from the cost of new construction. Physical deterioration is wear and tear (roof damage, peeling paint). Functional obsolescence is a design flaw that reduces desirability (outdated floor plan, no closets). External (economic) obsolescence is caused by factors outside the property (highway noise, declining neighborhood). In taxation, depreciation is a tax deduction that allows investment property owners to recover the cost of the building over its useful life: 27.5 years for residential rental and 39 years for commercial.
Exam Tip
For appraisal: three types of depreciation (physical, functional, external). For taxes: land is NEVER depreciated, only the building.
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Property Valuation
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NY Real Estate Property Valuation
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