Definition
Physical Depreciation or Deterioration
Physical Depreciation or Deterioration is the gradual decline in a property’s value primarily due to the wear and tear experienced over time. This can include a range of factors such as breakage, deferred maintenance, aging of construction materials, and the natural effects of environmental elements.
Examples
- Breakage: Cracked windows, broken door hinges, and damaged roofing shingles all contribute to physical depreciation.
- Deferred Maintenance: Failing to perform routine upkeep, such as painting or roof repairs, results in more substantial issues over time.
- Effects of Aging on Construction Material: Wooden structures might rot, metals could rust, and paint may peel from exposure to the elements.
- Normal Wear and Tear: High-traffic areas may show carpet wear, flooring scratches, or wall dents.
Frequently Asked Questions (FAQs)
Q1: How does physical depreciation differ from functional obsolescence?
- A: Physical depreciation relates to the deterioration from normal usage and aging. Functional obsolescence arises when a property’s design, layout, or features become outdated compared to current market preferences.
Q2: Can physical depreciation be prevented?
- A: While it cannot be entirely prevented, regular maintenance and timely repairs can significantly mitigate the effects of physical depreciation.
Q3: How is physical depreciation accounted for in a property appraisal?
- A: Appraisers assess physical depreciation by examining the property’s overall condition and estimating the cost needed for repairs and maintenance, deducting this value from the overall property worth.
Q4: Does physical depreciation affect property taxes?
- A: In some regions, significant deterioration might lead to lower property assessments, potentially reducing property taxes. However, this is not universally applicable.
Q5: Are there any specific industries that suffer more from physical depreciation?
- A: High-use industries such as hospitality, warehousing, and certain retail sectors, where large volumes of people or goods move frequently, generally sustain higher levels of physical depreciation.
Related Terms
- Economic Life: The time period over which an asset is expected to be usable for its intended purpose.
- Functional Obsolescence: Loss in value due to outdated features or design that no longer meet current market demands.
- Deferred Maintenance: Planned or unscheduled postponement of maintenance activities.
- Capital Improvements: Significant upgrades or repairs that increase the useful life or value of the property.
- Replacement Cost: The cost to replace an asset in its existing used condition.
Online Resources
- NAR (National Association of Realtors)
- Appraisal Institute
- HUD (U.S. Department of Housing and Urban Development)
- IRS Depreciation
References
- The Appraisal of Real Estate, Appraisal Institute
- IRS Publication 527 - Residential Rental Property
- Property Valuation: The Five Methods by David C. Twort
Suggested Books
- “The Appraisal of Real Estate” by Appraisal Institute
- “Real Estate Principles” by Charles F. Floyd and Marcus T. Allen
- “Property Valuation” by Peter Wyatt
- “Navigating the Real Estate Market” by David W. Reisinger
Real Estate Basics: Physical Depreciation or Deterioration Fundamentals Quiz
### What factors primarily contribute to physical depreciation?
- [x] Breakage, deferred maintenance, aging materials, and normal wear and tear.
- [ ] Economic downturns and technological advancements.
- [ ] Changes in zoning laws.
- [ ] Increases in interest rates.
> **Explanation:** Physical depreciation primarily includes deterioration factors like breakage, deferred maintenance, aging materials, and normal wear and tear.
### Can regular maintenance entirely prevent physical depreciation?
- [ ] Yes, regular maintenance can completely prevent it.
- [x] No, but it can significantly mitigate the effects.
- [ ] Yes, combined with property upgrades.
- [ ] No, it has no significant impact.
> **Explanation:** While regular maintenance can significantly mitigate the effects of physical depreciation, it cannot prevent it entirely.
### What should appraisers consider when accounting for physical depreciation?
- [x] Overall condition and costs for repairs.
- [ ] Current property tax assessments.
- [ ] Market demand and property age.
- [ ] Traffic patterns and future projections.
> **Explanation:** Appraisers assess the overall property condition and estimate repair costs to account for physical depreciation.
### How does physical depreciation impact property value?
- [x] It decreases the property's value.
- [ ] It increases the property's value.
- [ ] It has no impact.
- [ ] It varies depending on the property's location.
> **Explanation:** Physical depreciation generally decreases a property's value by highlighting the need for repairs and maintenance.
### Which area might experience higher physical depreciation?
- [ ] Office spaces.
- [ ] Agricultural lands.
- [x] High-use industries like hospitality and warehousing.
- [ ] Remote residential homes.
> **Explanation:** High-use industries such as hospitality and warehousing, where large volumes of people or goods move frequently, generally sustain higher levels of physical depreciation.
### Physical depreciation focuses on the _____.
- [ ] existing industrial trends.
- [ ] aesthetic appeal.
- [x] wear and tear experienced over time.
- [ ] current market preferences.
> **Explanation:** Physical depreciation focuses on the deterioration from normal usage and the wear and tear experienced over time.
### What is the primary distinction between physical depreciation and functional obsolescence?
- [ ] There is no distinction.
- [ ] Physical depreciation relates to market changes.
- [ ] Functional obsolescence arises from normal use.
- [x] Physical depreciation involves wear and tear, while functional obsolescence involves outdated features.
> **Explanation:** Physical depreciation stems from wear and tear, whereas functional obsolescence results from outdated design or features that no longer meet market needs.
### Would outdated appliances be an example of physical depreciation or functional obsolescence?
- [ ] Physical depreciation.
- [x] Functional obsolescence.
- [ ] Economic obsolescence.
- [ ] Statistical variance.
> **Explanation:** Outdated appliances are an example of functional obsolescence, as they involve older features that no longer meet current standards.
### What maintenance aspect directly combats physical depreciation in high-usage areas?
- [x] Regular and routine maintenance
- [ ] Implementing new building codes
- [ ] Upgrading properties every year
- [ ] Increasing property tax
> **Explanation:** Regular and routine maintenance directly combats physical depreciation by addressing wear and tear in high-usage areas.
### How is deferred maintenance related to physical depreciation?
- [x] It accelerates physical depreciation.
- [ ] It prevents physical depreciation.
- [ ] It's an unrelated concept.
- [ ] It negates depreciation entirely.
> **Explanation:** Deferred maintenance accelerates physical depreciation as postponing necessary repairs leads to further damage and decline in value.
