What does the Capitalization of Income method rely on for estimating depreciation?

The Capitalization of Income method is primarily focused on the income-generating potential of a property when estimating its value, particularly in the context of depreciation. This approach evaluates the income that a property can produce, typically through rent, and capitalizes that income to determine value. The rationale behind this method is that the potential income a property can generate is directly tied to its market value, and thus, understanding this income stream aids in making informed assessments of depreciation.

By utilizing the capitalization of rental income from similar properties, the method effectively incorporates market realities into the valuation process. This allows appraisers to create a more accurate and realistic portrait of a property’s value in relation to its income-generating capabilities. Therefore, by focusing on similar properties’ rental income, this method offers insight into how changes in income can affect property value over time, which is essential for estimating depreciation accurately.