Depreciation


Depreciation is any loss in the value of a property over time.  Tax laws allow investors to depreciate the value of the improvements.  This depreciation reduces their taxable income and is usually figured using the straight-line method.

This method assumes depreciation occurs at an even rate over the structure’s economic life or the time period over which the improvement can be profitably utilized.


Economic Life is the length of time during which a piece of property may be put to profitable use, usually less than its physical life.


Effective Age is the age of a property based upon its condition not its actual age. If an Appraiser examines a building that is 25 years-old, but because of superior upkeep has the condition of an 11 year-old building, the Appraiser may use the 11 year-old age as the Effective Age of the Property.


Physical Deterioration


Physical Deterioration would hurt the properties effective age


Physical Deterioration  is loss of value from all causes of age and action of the elements. Sources of physical depreciation include breakage, deferred maintenance, effects of age on construction material, and normal Wear and Tear. Depreciation expense for tax purposes is generally based on lives set by law for the given type of property and is not necessarily related to the useful life of the property.  Physical Deterioration is not a form of Obsolescence.


There are two forms of Obsolescence, Functional and Economic.


Functional Obsolescence


Functional Obsolescence is loss in value to an improvement resulting from functional problems caused by age or poor design. Functional Obsolescence might be likely if a property has a one-car garage in a 4 bedroom house. If two homes were built at the same time, adjacent to each other, and each for the same cost, but the values were different, it would be because of Functional Obsolescence.  Nearby nuisances is NOT Functional Obsolescence.  That is economic obsolescence.  


Economic Obsolescence


Economic Obsolescence, which is also known as social or external obsolescence, is a cause of depreciation that can occur because of factors extraneous to the property.  Economic Obsolescence is the most difficult to cure.


Examples of Economic Obsolescence would be:

  1. -Change in flight patterns

  2. -Zoning changes

  3. -Murder in the neighborhood

  4. -Proximity to an abandon gas station

These are all causes of depreciation that occur outside of the property lines.






Introduction

Bundle of Rights  

License   

Government Rights  

Police Power   

Eminent domain   

Taxation   

Escheat   

Real vs Personal Property

Annexation   

Appurtenances   

Fixtures   

Trade Fixture   

Emblements   

    OR-EE Rule   

Estates

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Fee simple absolute   

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Periodic Tenancy   

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Types of Leases   

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Property management

Contracts

Essentials of a valid contract   

Capable parties  

Lawful object   

Consideration   

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Types of Contracts   

Valid, Void & Voidable Contracts   

Implied contract   

Bilateral & Unilateral contacts   

Executed & Executory   

Option contract   

Land Contract   

Listings   

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Depreciation   

Physical Deterioration   

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Financing   

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Types of Loans   

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Investing   

Construction Terms   

Test Taking Tips