What is deducted from the replacement cost new of an improvement in the cost approach to value?

In the cost approach to value, the correct answer is accrued depreciation. This concept refers to the reduction in the value of an improvement due to various factors that can contribute to a decrease in market value over time. When determining the value of a property through the cost approach, appraisers begin with the replacement cost new of the improvements. From this amount, they must account for accrued depreciation to arrive at the current value.

Accrued depreciation encompasses three primary types: physical depreciation, functional obsolescence, and economic obsolescence. Physical depreciation involves wear and tear from physical usage, functional obsolescence pertains to outdated designs or features that may not appeal to current market demands, and economic obsolescence reflects the impact of external factors, such as neighborhood decline or changes in the economic environment.

By deducting accrued depreciation from the replacement cost new, appraisers provide a more accurate estimate of the property's value as it reflects the current condition and utility of the improvements as opposed to merely their construction cost. This is essential for ensuring that the assessed value aligns with market expectations and conditions.