Certified Residential Appraiser Practice Exam

What is considered the most commonly used method for calculating depreciation?

1. Sales Comparison Approach

2. Capitalization Method

3. Age-Life Method and Market Extraction

4. Cost Approach

The correct answer is: Age-Life Method and Market Extraction

The Age-Life Method and Market Extraction are widely recognized as common techniques for calculating depreciation in appraisal practices. The Age-Life Method estimates depreciation by comparing the effective age of a property to its total economic life, providing a straightforward calculation of how much value a property loses over time. It involves determining the depreciation percentage based on the ratio of the effective age to the total economic life, which allows appraisers to apply this percentage to the current replacement cost of the property to estimate the depreciated value. Market Extraction, on the other hand, assesses depreciation based on actual sales data of similar properties that have sold, factoring in the condition and age of those properties. This method can provide a more market-reflective measure of depreciation since it uses real-world examples. In contrast, other methods such as the Sales Comparison Approach primarily compare similar properties to deduce market value rather than directly calculating depreciation. The Capitalization Method focuses on income and is more applicable to investment properties. The Cost Approach can estimate depreciation but is not as specific or commonly used solely for that purpose compared to the Age-Life Method and Market Extraction. Thus, the combination of these two methods makes the correct answer a suitable representation of the most commonly used method for calculating depreciation.