Accrued Depreciation
Definition and meaning of Accrued Depreciation in real estate.
Accrued depreciation is the total loss in a property's value from all causes, including physical wear, functional obsolescence, and external factors, measured from the time the structure was built to the date of appraisal. It is used by appraisers to determine a property's current value under the cost approach.
In more detail
Unlike accounting depreciation used for tax purposes, accrued depreciation in appraisal measures actual physical and functional deterioration of the building. Physical wear includes items like a failing roof or worn carpets, while functional obsolescence refers to outdated design features like a house with only one bathroom.
External obsolescence is caused by factors outside the property lines, such as increased traffic noise. Investors use this metric to estimate how much capital is required to renovate a property and restore its market competitiveness.
Key facts
| Category | Real Estate Investing |
|---|---|
| Methods of calculation | Age-life method, breakdown method |
| Appraisal approach | Cost approach |
| Watch out for | Deferred maintenance costs |
An appraiser determines that an older office building has accrued depreciation due to physical wear on the roof and an outdated heating system, reducing its current valuation.
Frequently asked questions
Is accrued depreciation the same as tax depreciation?
No, tax depreciation is a fixed write-off allowed by the IRS, while accrued depreciation is the actual loss in value measured by an appraiser.
What is functional obsolescence in accrued depreciation?
Functional obsolescence is a loss in value due to outdated design, poor layout, or features that no longer meet modern buyer expectations.