California Real Estate Practice Exam

Which method is used to calculate depreciation in the context of property appraisal?

1. Accrual basis

2. Annual basis

3. Fixed basis

4. Value basis

The correct answer is: Accrual basis

In property appraisal, the method used to calculate depreciation must accurately reflect the decline in property value over time. The accrual basis, often involved in accounting, recognizes revenues and expenses when they are incurred, regardless of cash flow. In property valuation, this concept translates into understanding how various factors, such as wear and tear, economic obsolescence, or changes in market conditions, can impact a property's value. Using an accrual basis for depreciation allows appraisers to consider all relevant factors that might affect the overall market value of the property, not just the superficial or immediate costs associated with maintenance. This comprehensive approach is essential for providing a more accurate appraisal figure, as it acknowledges the ongoing nature of property value changes over time rather than merely reflecting annual fluctuations or fixed amounts. Other methods might not encompass the full scope of depreciation and could overlook important elements affecting the property's overall valuation.