California Real Estate Practice Exam

In the "income" approach to value, the recapture of capital invested in the improvements is provided for by:

1. accruals for depreciation

2. cost to cure

3. observed conditions

4. observed depreciation

The correct answer is: accruals for depreciation

In the income approach to value, which is commonly used for income-producing properties, the recapture of capital invested in improvements is accounted for through accruals for depreciation. This method recognizes that over time, the value of improvements decreases due to wear and tear, obsolescence, or other factors. By employing accruals for depreciation, an appraiser can systematically account for the loss in value of these improvements, reflecting the portion of the investment that has been used up or rendered obsolete. This approach facilitates a more accurate assessment of future income potentials and ensures that the property’s valuation aligns with its current market conditions and physical status. The other options, while relevant to property valuation processes, do not specifically address the recapture of capital invested in the improvements in the same way. Cost to cure relates to the expenses required to remedy physical deficiencies in a property. Observed conditions provide insights based on the current state and functionality of the property, but they don't directly capture capital recapture. Observed depreciation points to the physical decline of value but does not encapsulate the systematic methodology that accruals for depreciation do in terms of financial accounting for capital investment.