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Accrued Depreciation — What is it? How is it Estimated?

The following are excerpts from the IAAO’s book Property Appraisal and Assessment Administration.

In appraisal, accrued depreciation is the loss in value from reproduction or replacement cost new due to all causes except depletion, as of the date of appraisal. This differs from accounting depreciation, which is the difference between the original cost and current book value of an item. Accrued depreciation is measured as of the appraisal date and applies only to improvements. Accrued depreciation reflects the demand side of the market. The cost of construction represents the supply side of the market. Cost and value are most similar when improvements are new and represent highest and best use.

As improvements age, they suffer physical deterioration and obsolescence and, as a result, lose value relative to newer structures. This loss in value is caused by a perceived diminished utility for the property on the part of potential buyers. The true measure of depreciation, then, is the effect on marketability and sales prices. The appraiser estimates depreciation (loss in value) by analyzing the market and subtracts depreciation from replacement cost new to estimate the market value of improvements. Only items included in replacement cost new can be depreciated.

There are three types of depreciation. Physical deterioration, is the loss in value due to wear and tear and the forces of nature. Functional obsolescence is loss in value due to inability of the structure to perform adequately the function for which it is used, as of the appraisal date. This results from changes in demand, design, and technology and can take the form of deficiency (for example, only one bathroom), need for modernization (for example, outmoded kitchen), or superadequacy (for example, overly high ceilings). Economic obsolescence, also called locational or external obsolescence, is loss in value as a result of impairment in utility and desirability caused by factors outside the property’s boundaries. It may be the result of inadequate public services, lack of parking facilities in a retail business district, narrow streets and heavy traffic in a residential neighborhood, or proximity to inharmonious industrial and commercial land use.

Please direct questions to the St. James Parish Assessor’s Office.

Updated: 11/23/2011

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