Understanding Different Types of Depreciation

By: navjeet kaur


Many people often face the problem of depreciation after owning the real estate. While it can be good for business, it is certainly not beneficial for the owners. It refers to decline in the value of your asset over the period of time. Different fields of study like accounting, appraising and taxation intricate on it to suit their needs. Depreciation is mainly of three kinds and each of it has different effect on your property. Below mentioned are the different types of the same.

Physical depreciation
It includes wear and tear from usual use of physical elements. Physical depreciation can be curable and non-curable. Curable reduction is one where replacement of deteriorated physical elements is economical. For an instance, replacement or repair of broken doors and windows, rematerializing parking area and other physical items, which after being repaired or replaced add more value to your property come under curable form of decline in property value. On the contrary, incurable depreciation is one which cannot be corrected either practically or economically at the time of real estate appraisal. It includes short-lived components like furnace, roof cover and water heater as well as long-lived elements like roof structure, insulation, underground piping system and structural framing.

Functional obsolescence
Functional obsolescence is another form responsible for reduction in property value. It includes any fault or error in the structure, design or material of real estate elements that weakens the utility, function and value of enhancement. An example of this class includes an obsolete air conditioning system, which, even though is still operating as it was actually proposed, is however no longer able to comply with market standards and is, therefore, in need to be retrofitted. In such a case, functional loss would be calculated as the sum of cost of air conditioner and the cost to cure, in case the old unit is replaced by a new one with lower salvage value, less the cost of physical depreciation amount and the cost of installation of new element.

External obsolescence
External obsolescence is one when the property value decreases due to external influence. It is mainly caused because of location or economic factors and can be temporary or can last lifelong. Permanent external obsolescence is usually not curable and requires extra efforts on the part of asset owner. An example of this type includes overbuilding the property and then witnessing reduced demand of the same.

To sum up, decrease in asset value includes much more than merely calculating the age or life of real estate based on its physical reduction. Considering this, it might not surprise you to know that depreciation is misinterpreted by many individuals, including the appraisers, reason being lack of knowledge about external and functional depreciation. For a fact, decline in property value is a complex topic; therefore, it is wise to seek help of valuation experts to make sure you measure precise depreciation on your real estate. However, it is also equally vital to ensure that the professional you choose for this job is trustworthy and experienced enough to provide unbiased help.

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