Depreciation

There is a special and direct economic value in real estate between Time and Value: as land becomes more scarce and appreciates the improvements on the land are subject to obsolescence and depreciation. Obsolescence is an economic variable used by governments, economists, experts and Realtors, reflecting the fact that the building located on a piece of land with the old time, just like me. And, unlike wine, a building that ages with time there is nothing better, once again, just like me. No wonder that I am in real estate - but I digress.

There are two types of depreciation when it comes to actual capital goods: physical and functional. And both the physical and functional depreciation can be classified as either curable or incurable.

[] Physical Depreciation

Physical depreciation represents the accumulated loss in market value caused by wear and tear from the date the building was completed. Curable physical depreciation refers to damage that can be corrected economically, and includes elements such as poor decorative accessories obsolete or broken, worn carpet, faded or old paint, appliances not in a proper work order as well as the roofs of aging. On the other hand physical depreciation incurable includes the wear of the structural elements and foundations in which the repair or replacement is likely to entail significant costs. These two types of depreciation are treated differently. The dollar amount of the deduction required for physical depreciation is generally reversible on the basis of the cost required to make repairs. In contrast, the allowance for depreciation is incurable physical more difficult to estimate, with the main cause of this difficulty lies in the determination of the residual life of the building.

There is no accurate way to estimate the cost of correcting physical incurable depreciation. In general, the cost of this type of correction is so great that, in terms of economy is the structure should be left in its present state or completely reconstructed. Governments tend to estimate the economic life of buildings in terms of straight-line depreciation, but this is so only because it makes the estimate of gains and losses, and whether they recover a little 'easier to determine from an accounting point of view. Experts and experienced Realtors, on the other hand, tend to formulate a hypothesis most often with regard to incurable physical depreciation based on visual observation, while economists are based on knowledge of regional market data comparable.

[] Depreciation functional

This type of depreciation describes the loss in value caused by outdated or inadequate design. Here too is necessary to distinguish between curable and incurable functional depreciation. Functional curable depreciation includes items such as the cost of replacing old equipment, installing an additional bathroom or otherwise make changes to the existing plan, for example, the creation of new ports and blocking old ones, or market trends as a result strengthening the visual layout of rooms with open and light-play. Also in this case, the amount of which is reduced the market value is in direct function of the cost involved in carrying out the necessary updates.

And, as before, the amount by which market value is reduced because of the functional incurable depreciation is entirely a matter of judgment and can not be determined by calculating the arithmetic. There are, of course, limits to what can be done to cure functional depreciation. For example, if an architectural style has gone out of fashion, nothing can be done and a factor of increased deduction will be applied. The opposite is true, of course, plans that never go out of style. For example, residential farmers are always at the top of demand and highly sought after by elderly couples and young alike, but for opposite reasons: the lack of stairs to the first maintenance and easy for the second.

Luigi Frascati ......