Historic Cost

Definition

The term “historic cost” in real estate denotes the cost of constructing or acquiring a property at the time it was originally built or purchased. This is distinct from the original cost, which is the price paid by the current owner upon purchase. The historic cost includes expenses for materials, labor, and other relevant expenditures at the time of construction.

Examples

Example 1: A house built in 1950 cost $10,000 to construct. Its historic cost is $10,000. If the current owner purchased it in 2018 for $295,000, that $295,000 is the original cost for the current owner.
Example 2: A commercial building was constructed in 1985 for $500,000. This amount is its historic cost. If the building was sold five years ago for $2 million, the $2 million represents the original cost to the present owner.

Frequently Asked Questions

What distinguishes historic cost from original cost?

Answer: Historic cost refers to the amount spent to build or acquire a property at the time of its initial construction or purchase. Original cost, however, pertains to the purchase price paid by the current owner.

Why is historic cost important in real estate?

Answer: Historic cost serves as a benchmark for accounting and financial evaluation. It aids in understanding the property’s appreciation over time and can help in tax assessments and insurance valuations.

How is historic cost calculated?

Answer: Historic cost is calculated based on the sum of all costs incurred during the construction or acquisition of the property, including material costs, labor, and other associated expenses.

Does historic cost change over time?

Answer: No, historic cost remains constant as it represents the initial cost at the time of construction or purchase, regardless of subsequent changes in property value.

Can historic cost be adjusted?

Answer: Historic cost is typically not adjusted for inflation or other economic changes. It is a static figure used for historical and comparative purposes.

Original Cost: The amount the current owner paid to acquire the property.
Market Value: The estimated amount for which a property should exchange on the date of valuation.
Depreciation: A reduction in the value of an asset over time, commonly due to wear and tear.
Appraisal: An evaluation of property value, often conducted by a certified professional.
Replacement Cost: The cost to replace an asset with a similar asset at today’s prices.

Online Resources

References

Investopedia. (n.d.). Historic Cost. Retrieved from https://www.investopedia.com/terms/h/historic-cost.asp
REALTOR.com. (n.d.). Real Estate Glossary. Retrieved from https://www.realtor.com/realestateagents/glossary
Accounting Coach. (n.d.). Historical Cost. Retrieved from https://www.accountingcoach.com/terms/H/historical-cost

Suggested Books for Further Studies

“Real Estate Finance & Investments” by William B. Brueggeman and Jeffrey D. Fisher
“The Real Estate Investor’s Handbook: The Complete Guide for the Individual Investor” by Steven D. Fisher
“Real Estate Principles: A Value Approach” by David C. Ling and Wayne R. Archer
“Property Valuation Techniques” by David Damien and Michael Sandford

Real Estate Basics: Historic Cost Fundamentals Quiz

### What does historic cost refer to in real estate? - [ ] The current market value of a property. - [x] The original financial expenditures for construction or acquisition. - [ ] The cost to replace a property at today's prices. - [ ] The total amount spent on property maintenance. > **Explanation:** Historic cost in real estate refers to the original financial expenditures incurred during the construction or acquisition of a property. ### How is historic cost different from original cost? - [x] Historic cost is related to the initial expenditure when the property was first built or acquired, while the original cost is the amount the current owner paid. - [ ] Historic cost is always higher than the original cost. - [ ] There is no difference between historic cost and original cost. - [ ] Original cost factors in inflation, while historic cost does not. > **Explanation:** Historic cost pertains to the initial expenditure when the property was first built or acquired, while original cost is the purchase price paid by the current owner. ### Does historic cost change over time? - [ ] Yes, it changes with inflation. - [ ] Yes, it adjusts according to current market values. - [x] No, it remains constant. - [ ] Yes, it varies with property depreciation. > **Explanation:** Historic cost remains constant over time as it represents the original cost recorded during construction or acquisition. ### Why is historic cost significant in real estate? - [ ] It helps determine current market value. - [x] It provides a benchmark for financial analysis and accounting. - [ ] It dictates the selling price of the property. - [ ] It adjusts with market trends. > **Explanation:** Historic cost is significant because it provides a benchmark for financial analysis, accounting, and historical valuations. ### Can historic cost be adjusted for modern economic changes? - [ ] Yes, it is recalculated periodically. - [ ] Yes, but only due to property improvements. - [x] No, it is a static historical metric. - [ ] No, it automatically reflects inflation. > **Explanation:** Historic cost is a static historical metric and is not adjusted for modern economic changes. ### What expenses contribute to the calculation of historic cost? - [x] Material, labor, and associated expenditures. - [ ] Only material costs. - [ ] Future maintenance costs. - [ ] Sale commissions of real estate agents. > **Explanation:** Historic cost includes expenses for materials, labor, and other associated expenditures incurred during construction or acquisition. ### Which recording practice specifically describes historic cost in accounting terms? - [ ] Market cost recording. - [x] Historical cost principle. - [ ] Recreational cost accounting. - [ ] Cost-plus pricing. > **Explanation:** The historical cost principle in accounting describes recording assets based on their original cost at the time of acquisition or construction. ### When is historic cost typically used in property appraisal? - [ ] To estimate future property values. - [ ] To determine current market prices. - [x] To compare past expenditure and original valuation. - [ ] To adjust local property taxes. > **Explanation:** Historic cost is typically used in property appraisals to compare past expenditure and original valuation. ### Does historic cost include future inflation adjustments? - [ ] Yes, future adjustments are included. - [x] No, it purely reflects the original expenditure. - [ ] Yes, but only after yearly assessments. - [ ] It depends on the property's financial assessment. > **Explanation:** Historic cost reflects purely the original expenditure and does not include future inflation adjustments. ### What kind of properties usually record historic cost for assessment purposes? - [x] Both residential and commercial properties. - [ ] Only commercial properties. - [ ] Only residential properties. - [ ] Government-owned properties only. > **Explanation:** Both residential and commercial properties usually record historic cost for assessment purposes.