California Real Estate Practice Exam

When an appraiser evaluates real property, his concept of annual, or periodic, depreciation applies to which of the following?

1. Actual life

2. Economic life

3. Physical life

4. Theoretical life

The correct answer is: Actual life

The concept of annual or periodic depreciation that an appraiser considers is primarily related to economic life. Economic life refers to the period during which a property is expected to be economically viable and generate income. As properties age and depending on market conditions, their ability to produce income diminishes, which reflects in the depreciation calculation. In this context, the appraiser evaluates how much value a property loses each year relative to its economic productivity. This is particularly important for assessments involving investment properties, where the cash flow and profitability over time are critical to determining value. While actual life might refer to the total lifespan of the property, physical life pertains to the tangible aspects and structural integrity of the property. Theoretical life is more abstract and less commonly used in practical appraisals. Understanding economic life is crucial for appraisers as it directly correlates with an asset's financial performance.