Which appraisal approach takes depreciation into account?

The cost approach is the method that specifically takes depreciation into account when valuing a property. In this approach, the appraiser estimates the cost to replace or reproduce a property and then deducts any accrued depreciation to arrive at the current market value. This encompasses physical, functional, and external depreciation, which reflects the decrease in value from factors such as wear and tear, outdated features, or shifts in market conditions that negatively affect the desirability of the property.

In contrast, the other approaches focus on different valuation aspects. The market data approach emphasizes comparative sales data to estimate value without explicitly accounting for depreciation in the same way the cost approach does. The sales comparison approach, similar to the market data approach, relies on comparable recent sales but does not separately analyze depreciation; it synthesizes market conditions and prices of similar properties. The income approach analyzes the income generated by the property rather than its cost or depreciative factors, focusing on investment value based on potential revenue rather than physical condition or depreciation. Therefore, the cost approach stands out as the one that explicitly incorporates depreciation into its valuation calculation.