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Illinois exam glossary

Depreciation

Depreciation is one word with several professional meanings. On an appraisal question, look for lost utility and value. On a tax question, look for basis recovery under statutory rules. On a mortgage question, you may actually be dealing with amortization. Identifying the context is the first calculation.

Last updated: August 1, 2026

What does this exam area cover?

Short answer: Appraisal depreciation is the loss in improvement value from all causes: physical deterioration, functional obsolescence, and external obsolescence. Physical and functional items may be curable or incurable depending on economic feasibility; external obsolescence is usually incurable by the owner. In the cost approach, accrued depreciation is deducted from replacement or reproduction cost new. This market-based value loss is different from federal tax depreciation and from mortgage amortization.

Official section
National III: Valuation
Broker weight
8% of the national broker portion
Expected scored items
Valuation accounts for about 8 of 100 items

This guide follows the current Illinois appraiser statute and agency resources, USPAP access from The Appraisal Foundation, the PSI Illinois exam outline, Fannie Mae cost-approach guidance published through June 3, 2026, and IRS Publications 946 and 527 current for 2025 returns and posted in 2026, all checked through August 1, 2026. Tax examples are included only to prevent exam-category confusion. Tax basis, recovery period, convention, bonus depreciation, recapture, and eligibility require current tax-law analysis outside this study page.

What is on the official outline?

Topic
Identify the depreciation context
What to know
Appraisal value loss, cost approach, tax basis recovery, accounting allocation, mortgage amortization, economic depreciation, effective date, tax year, property interest, purpose, and governing source
Best exam move
Before doing math, decide whether the question asks about value, tax deduction, accounting, or loan repayment.
Topic
Define accrued depreciation
What to know
Loss in value, improvements, all causes, effective date, cost new, market evidence, observed condition, utility, external influence, total loss, and depreciated improvement value
Best exam move
In appraisal, accrued depreciation is the gap between cost new and current contribution of the improvements.
Topic
Diagnose physical deterioration
What to know
Wear, tear, age, decay, corrosion, water damage, roof, paint, flooring, mechanical system, structural damage, deferred maintenance, casualty, short-lived item, and long-lived item
Best exam move
Physical deterioration concerns condition and material performance, not whether the layout suits modern buyers.
Topic
Diagnose functional obsolescence
What to know
Poor layout, inadequate bath, low ceiling, narrow bay, obsolete system, excess corridor, superadequacy, deficiency, design, internal utility, operating inefficiency, modern standard, and market preference
Best exam move
The cause comes from a feature, absence, design, or utility issue within the property.
Topic
Diagnose external obsolescence
What to know
Traffic, airport, railroad, industrial neighbor, landfill, zoning action, environmental influence, oversupply, job loss, economic decline, tax burden, regulation, market rent drop, and outside ownership control
Best exam move
The loss originates beyond the property boundaries or the owner's practical control.
Topic
Test physical curability
What to know
Deferred maintenance, cost to repair, value after repair, value added, immediate need, normal replacement, short-lived component, long-lived component, economic feasibility, and market expectation
Best exam move
If a $9,000 repair supports a $14,000 value gain, the simplified exam facts point toward curable deterioration.
Topic
Test functional curability
What to know
Deficiency requiring addition, deficiency requiring substitution, superadequacy, cure cost, salvage, existing component value, replacement cost, operating savings, rent increase, value gain, and market acceptance
Best exam move
A design defect can be physically changeable but economically incurable when the cost exceeds the supported benefit.
Topic
Recognize external incurability
What to know
Off-site source, public infrastructure, neighborhood influence, industry decline, supply imbalance, regulation, ownership limit, temporary loss, permanent loss, paired sales, rent loss, and capitalization
Best exam move
The owner generally cannot cure an off-site cause, but the appraiser still measures its effect from market evidence.
Topic
Separate chronological and effective age
What to know
Construction date, actual years, condition, maintenance, modernization, renovation, utility, deferred work, market perception, apparent age, and observed age
Best exam move
Calendar age is a fact; effective age is an appraisal judgment supported by condition and utility.
Topic
Separate economic and physical life
What to know
Value contribution, legal use, market demand, functional utility, physical survival, maintenance, demolition, conversion, remaining economic life, total economic life, and useful life
Best exam move
A building may physically stand long after it stops contributing enough value to justify its continued use.
Topic
Apply the age-life method
What to know
Effective age, total economic life, remaining economic life, straight-line ratio, depreciation percentage, cost new, composite loss, simple assumption, rounding, and method limitation
Best exam move
Effective age divided by total economic life gives the simple age-life depreciation fraction.
Topic
Use the breakdown method
What to know
Observed condition, itemized loss, curable physical, incurable short-lived, incurable long-lived, curable functional, incurable functional, external, remaining life, cost to cure, and no double counting
Best exam move
The breakdown method estimates distinct causes rather than forcing every loss into one composite age ratio.
Topic
Extract depreciation from sales
What to know
Comparable sale price, land value, contributory improvement value, replacement cost new, reproduction cost new, site improvement, market-derived loss, effective age, economic life, and comparable consistency
Best exam move
Sale price minus land value can indicate improvement value; cost new minus that contribution can indicate accrued depreciation.
Topic
Measure external loss
What to know
Paired sales, rent difference, NOI loss, capitalization rate, before-and-after evidence, market survey, location adjustment, temporary duration, present value, allocation, and subject exposure
Best exam move
A supported annual NOI loss can be capitalized when the income and rate are appropriate and the duration is understood.
Topic
Avoid double counting
What to know
Replacement-cost design, reproduction obsolete feature, age-life composite, separate cure cost, market-condition effect, site value, sales adjustment, functional loss, external loss, and overlapping method
Best exam move
Do not deduct the same weakness through cost selection, age-life loss, and a separate obsolescence line without reconciliation.
Topic
Calculate depreciated value
What to know
Cost new, physical loss, functional loss, external loss, total accrued depreciation, depreciated improvement value, land value, site improvements, cost approach indication, and rounding
Best exam move
Subtract accrued depreciation from improvement cost new, then add land and any separately treated depreciated site improvements.
Topic
Understand federal tax depreciation
What to know
Basis, business use, income-producing property, determinable life, more than one year, placed in service, MACRS, recovery period, convention, residential rental, nonresidential real property, land exclusion, and deduction
Best exam move
Tax depreciation recovers qualifying basis under statute and can continue even while market value appreciates.
Topic
Separate depreciation and amortization
What to know
Loan principal, interest, payment schedule, declining balance, intangible asset, basis allocation, appraisal value loss, tax deduction, remaining balance, and context clue
Best exam move
A loan-balance question is amortization, not physical or functional appraisal depreciation.
Topic
Evaluate reliability
What to know
New property, old property, hidden condition, renovation history, special purpose, land value, local cost, market sale, expense data, paired evidence, temporary external factor, effective date, and professional judgment
Best exam move
A precise depreciation percentage is not persuasive unless its market, condition, and cost assumptions are credible.

Which distinctions produce the most mistakes?

Terms
Appraisal depreciation vs. tax depreciation
Difference
Appraisal depreciation measures current market value loss from all causes. Tax depreciation recovers qualifying basis through statutory deductions and assigned rules.
Question cue
Value loss versus basis recovery.
Terms
Depreciation vs. amortization
Difference
Appraisal depreciation concerns loss in improvement value. Mortgage amortization repays loan principal over time; tax amortization can allocate certain intangible basis.
Question cue
Property value loss versus scheduled allocation or repayment.
Terms
Physical vs. functional
Difference
Physical deterioration comes from condition, wear, age, or damage. Functional obsolescence comes from internal design, feature, or utility inadequacy or excess.
Question cue
Material condition versus internal usefulness.
Terms
Functional vs. external
Difference
Functional obsolescence originates inside the property. External obsolescence originates outside the property or ownership control.
Question cue
Inside cause versus outside cause.
Terms
Curable vs. incurable
Difference
Curable loss can be corrected with an economically justified action. Incurable loss cannot be corrected economically or lies beyond ownership control.
Question cue
Feasible cure versus unsupported or unavailable cure.
Terms
Short-lived vs. long-lived item
Difference
A short-lived component has less remaining life than the overall structure. A long-lived component is tied more closely to the building's remaining life.
Question cue
Component cycle versus structure cycle.
Terms
Chronological age vs. effective age
Difference
Chronological age is time since construction. Effective age reflects condition, modernization, utility, and market perception.
Question cue
Calendar fact versus observed condition judgment.
Terms
Economic life vs. physical life
Difference
Economic life is the period during which improvements contribute value. Physical life is how long they can continue to exist or function physically.
Question cue
Value contribution versus physical survival.
Terms
Total economic life vs. remaining economic life
Difference
Total economic life covers the full value-producing period. Remaining economic life runs from the effective date to the end of that contribution.
Question cue
Whole period versus time left.
Terms
Age-life method vs. breakdown method
Difference
Age-life applies a composite effective-age ratio. Breakdown identifies and measures separate curable and incurable physical, functional, and external losses.
Question cue
Composite shortcut versus itemized diagnosis.
Terms
Market extraction vs. cost to cure
Difference
Market extraction infers total loss from sale, land, and cost evidence. Cost to cure estimates the expense of correcting a particular item and tests its economic feasibility.
Question cue
Sale-derived total versus item-specific correction.
Terms
Land-value decline vs. improvement depreciation
Difference
Land value can change because of market and legal forces. Improvement depreciation is deducted from cost new for physical, functional, and external loss in the improvements.
Question cue
Site market change versus improvement cost loss.

The L-O-S-S depreciation diagnosis

  1. Label the context: decide whether the question concerns appraisal value loss, cost approach, federal tax basis recovery, accounting allocation, or mortgage amortization, then identify its date and governing assumptions.
  2. Observe the cause: inspect physical condition, design and utility, external influences, effective age, short-lived and long-lived components, maintenance, renovation, market reaction, legal use, and income performance.
  3. Sort and test curability: classify physical, functional, or external loss, compare cure cost with supported value benefit, identify owner control, separate temporary and permanent influence, and avoid calling every repair economically curable.
  4. Select a measurement: use age-life for a supported composite estimate, breakdown for itemized loss, market extraction from sales, paired evidence, cost to cure, capitalization of income loss, or another assignment-appropriate method.
  5. Subtract without duplication: reconcile overlapping methods, deduct total accrued depreciation once from cost new, add land separately, handle site improvements consistently, and show effective-date math clearly.
  6. Support the conclusion: disclose evidence and uncertainty, test the depreciated result against market behavior, use current Illinois, USPAP, lender, or IRS sources for the actual context, and never convert a study shortcut into professional advice.
Cause
Physical
Location
In materials or condition
Typical examples
Roof wear, peeling paint, damaged system, deferred maintenance
Cause
Functional
Location
Inside property design or utility
Typical examples
Poor layout, deficiency, obsolete system, superadequacy
Cause
External
Location
Outside property or owner control
Typical examples
Highway, airport, incompatible use, economic oversupply
Cause
Curable
Location
Economically correctable
Typical examples
Cure cost supported by equal or greater value benefit
Cause
Incurable
Location
Not economically correctable
Typical examples
Premature structural replacement or off-site influence
Cause
Tax
Location
Statutory basis recovery
Typical examples
MACRS deduction for qualifying income-producing property

How do the rules work in scenarios?

Calculate simple age-life depreciation

Scenario: An improvement has a replacement cost new of $480,000, effective age of 15 years, and total economic life of 60 years.

  1. $15 / 60 = 25 percent depreciation under the simple age-life model.
  2. $480,000 x 25 percent = $120,000 accrued depreciation.
  3. $480,000 - $120,000 = $360,000 depreciated improvement value.

Answer: Accrued depreciation is $120,000 and depreciated improvement value is $360,000.

A renovated property has lower effective age

Scenario: A 40-year-old building received new systems, roof, windows, finishes, and layout improvements. Its condition and utility compete with typical 12-year-old buildings.

  1. Chronological age remains 40 years.
  2. Effective age reflects observed condition, utility, and market perception.
  3. A supported effective age near 12 may be appropriate despite the construction date.

Answer: Do not substitute chronological age for the supported effective-age judgment.

Peeling paint is physical deterioration

Scenario: Exterior paint is failing. Repainting costs $11,000, and market evidence indicates the correction adds at least $14,000 in value.

  1. The cause is physical condition.
  2. The owner can complete the work.
  3. Under the simplified evidence, the supported value benefit exceeds cost to cure.

Answer: Classify it as curable physical deterioration and measure the supported cure consistently.

An overbuilt lobby creates functional loss

Scenario: A small neighborhood office building has a marble two-story lobby that cost $300,000 more than a typical lobby, but buyers recognize only $70,000 of additional value.

  1. The feature is within the property and exceeds market requirements.
  2. Its cost exceeds its contribution to value.
  3. Removing it may not be economical, so the superadequacy can be incurable functional obsolescence.

Answer: Analyze the unsupported excess cost as functional obsolescence, not physical wear.

Capitalize an external rent loss

Scenario: A new off-site noise source causes a supported permanent NOI loss of $18,000 per year. Comparable market evidence supports a 9 percent rate for the loss under the question's simplified assumptions.

  1. The cause is outside the property.
  2. $18,000 / 0.09 = $200,000.
  3. The duration, income basis, and rate must be consistent before the capitalization is credible.

Answer: The indicated external-obsolescence amount is $200,000 under the stated assumptions.

Extract depreciation from a sale

Scenario: A comparable sold for $700,000. Its land is estimated at $180,000 and current improvement cost new at $650,000, with site items handled consistently.

  1. $700,000 - $180,000 = $520,000 indicated improvement contribution.
  2. $650,000 - $520,000 = $130,000 indicated accrued depreciation.
  3. $130,000 / $650,000 = 20 percent extracted depreciation.

Answer: The market-extracted accrued depreciation is $130,000, or 20 percent of cost new.

Tax depreciation can coexist with appreciation

Scenario: An investor owns qualifying rental real estate that rises in market value while the owner claims allowable federal depreciation deductions on the depreciable basis.

  1. Tax depreciation follows statutory cost-recovery rules.
  2. Market appreciation follows supply, demand, income, and investor expectations.
  3. The two measures answer different questions and can move in opposite directions.

Answer: Do not use accumulated tax deductions as an automatic measure of appraisal value loss.

What are the common exam traps?

Trap
Treating every depreciation question as tax
Correction
Look for context: value loss, basis recovery, accounting allocation, or mortgage repayment.
Trap
Calling mortgage amortization depreciation
Correction
Amortization reduces loan principal; appraisal depreciation reduces improvement value from identified causes.
Trap
Depreciating land with the building rate
Correction
Land is valued separately in the cost approach and is not assigned the building's age-life loss.
Trap
Using chronological age automatically
Correction
Age-life appraisal uses supported effective age, which reflects condition, modernization, and utility.
Trap
Calling a worn roof functional
Correction
Wear and material condition are physical; layout and utility problems are functional.
Trap
Calling an airport influence functional
Correction
An off-site adverse influence is external even when it affects how occupants use the property.
Trap
Assuming physical means curable
Correction
Some physical loss is incurable because premature correction is not economically justified.
Trap
Assuming functional means incurable
Correction
A poorly placed partition or missing fixture can be curable when correction is feasible and supported by value benefit.
Trap
Calling external obsolescence unmeasurable
Correction
Paired sales, income loss capitalization, market extraction, and other evidence can estimate outside influence.
Trap
Using cost to cure as value loss automatically
Correction
Cost and value effect can differ; curability and deduction method require market-supported analysis.
Trap
Double counting the same defect
Correction
Reconcile age-life, breakdown, replacement-cost, sale-adjustment, and income-loss treatments before deducting loss.
Trap
Ignoring site improvements
Correction
Paving, fencing, wells, landscaping, and similar additions can have finite lives and separate depreciation.
Trap
Equating assessed depreciation with market loss
Correction
Assessment schedules may be evidence but do not replace subject-specific effective-date appraisal analysis.
Trap
Assuming tax deduction proves market decline
Correction
Statutory basis recovery can continue during market appreciation.
Trap
Forgetting method limitations
Correction
A composite age-life rate can hide curable items and external loss, while detailed methods can create false precision without good data.

Can you answer these original practice questions?

These questions are original study items aligned to the published outline. They are not copied, recalled, or predicted PSI questions.

1. What is accrued depreciation in appraisal?

  1. Loss in improvement value from all causes
  2. Mortgage principal paid
  3. Only a federal tax deduction
  4. Land appreciation
Show answer and explanation

Answer: Loss in improvement value from all causes

The causes are physical deterioration, functional obsolescence, and external obsolescence.

2. A worn roof is which category?

  1. Physical deterioration
  2. Functional obsolescence
  3. External obsolescence
  4. Mortgage amortization
Show answer and explanation

Answer: Physical deterioration

The loss comes from the condition and remaining life of a building component.

3. An obsolete floor plan is which category?

  1. Functional obsolescence
  2. External obsolescence
  3. Tax depreciation
  4. Land residual
Show answer and explanation

Answer: Functional obsolescence

The design or utility problem originates within the property.

4. A nearby landfill causes value loss. Which category applies?

  1. External obsolescence
  2. Physical deterioration
  3. Functional obsolescence
  4. Amortization
Show answer and explanation

Answer: External obsolescence

The adverse cause is outside the property and generally beyond the owner's control.

5. Effective age is 18 years and total economic life is 60 years. What is the simple age-life rate?

  1. 30 percent
  2. 18 percent
  3. 42 percent
  4. 70 percent
Show answer and explanation

Answer: 30 percent

$18 / 60 = 0.30.

6. What makes a depreciation item curable?

  1. The cure is economically justified under supported market evidence
  2. The defect is visible
  3. The building is new
  4. The owner dislikes it
Show answer and explanation

Answer: The cure is economically justified under supported market evidence

Physical possibility alone does not prove economic curability.

7. What does effective age reflect?

  1. Observed condition, utility, maintenance, and modernization
  2. Only the construction year
  3. The mortgage term
  4. The tax filing date
Show answer and explanation

Answer: Observed condition, utility, maintenance, and modernization

Chronological age alone does not describe current condition or market perception.

8. What does the breakdown method do?

  1. Itemizes physical, functional, and external depreciation
  2. Calculates loan interest
  3. Values land by GRM
  4. Uses chronological age only
Show answer and explanation

Answer: Itemizes physical, functional, and external depreciation

It can separate curable and incurable components rather than using one composite rate.

9. Which statement about federal tax depreciation is correct?

  1. It is statutory basis recovery and is not the same as appraisal value loss
  2. It always equals market decline
  3. Land always receives the building deduction
  4. It is mortgage amortization
Show answer and explanation

Answer: It is statutory basis recovery and is not the same as appraisal value loss

IRS rules determine tax deductions, while appraisal depreciation measures current market loss from all causes.

10. Cost new is $500,000 and accrued depreciation is $125,000. What is depreciated improvement value?

  1. $375,000
  2. $625,000
  3. $125,000
  4. $4,000
Show answer and explanation

Answer: $375,000

$500,000 - $125,000 = $375,000 before adding land or separately treated site items.

How should you study this area?

Session
Session 1
Focus
Separate the contexts
Proof you are ready
Classify 40 prompts as appraisal depreciation, tax depreciation, accounting amortization, or mortgage amortization before solving any formula.
Session
Session 2
Focus
Diagnose the cause
Proof you are ready
Classify 60 property conditions as physical, functional, or external and explain the source of each loss in one sentence.
Session
Session 3
Focus
Test curability
Proof you are ready
Compare cure cost, value benefit, owner control, component life, and market feasibility for 30 physical and functional conditions.
Session
Session 4
Focus
Calculate age-life loss
Proof you are ready
Solve 25 effective-age, total-life, remaining-life, depreciation-rate, cost-new, and depreciated-value problems.
Session
Session 5
Focus
Measure beyond age-life
Proof you are ready
Complete ten breakdown cases, five market-extraction cases, and five external-income-loss capitalization cases without double counting.
Session
Session 6
Focus
Run L-O-S-S
Proof you are ready
Complete two depreciation analyses, reconcile each with cost and sale evidence, then score at least 90 percent and explain every missed question.

Do not count recognition as mastery. Close the notes and explain the rule, apply it to a new fact pattern, and identify why each distractor fails.

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Questions students ask about Depreciation in Real Estate: Illinois Exam Guide

What is depreciation in real estate appraisal?

In appraisal, accrued depreciation is the loss in value of improvements from all causes as of the effective date. It includes physical deterioration, functional obsolescence, and external obsolescence. In the cost approach, accrued depreciation is deducted from replacement or reproduction cost new before the depreciated improvement value is combined with land value.

What are the three types of appraisal depreciation?

Physical deterioration, functional obsolescence, and external obsolescence. Physical deterioration is wear, damage, age, or deferred maintenance. Functional obsolescence is a utility or design problem within the property. External obsolescence is a loss caused by something outside the property, such as adverse traffic, economic decline, or incompatible nearby use.

What is curable depreciation?

Curable depreciation is a value loss that can be corrected economically. A common exam test compares the cost to cure with the value the cure is expected to add. If the value benefit supports the expense and the owner can reasonably make the correction, the item may be curable. Physical or functional depreciation can be curable; external loss usually is not.

What is incurable depreciation?

Incurable depreciation cannot be corrected economically, is not feasible to correct, or lies outside the owner's control. A worn structural component with long remaining life may be uneconomic to replace early. A highway or industrial nuisance outside the site generally cannot be removed by the owner. Incurable does not mean the loss is impossible to estimate.

What is effective age?

Effective age is the age indicated by the improvement's observed condition, utility, modernization, maintenance, and market appeal. It can be lower than chronological age after strong renovation and maintenance or higher after neglect. Effective age is used with total economic life in a simple age-life depreciation estimate.

How is age-life depreciation calculated?

Divide effective age by total economic life to estimate the depreciation percentage, then multiply that percentage by the applicable cost new. For example, an effective age of 18 years and total economic life of 60 years suggests 30 percent depreciation under the simple age-life model. The method is broad and can hide separate curable or external losses.

Does land depreciate?

In the standard appraisal cost approach, land value is estimated separately and is not reduced through building age-life depreciation. Land value can rise or fall because of market, legal, environmental, access, or use changes, but that is not the same calculation as accrued depreciation of improvements. Current IRS guidance also says land itself is not depreciable for federal income-tax cost recovery.

Is appraisal depreciation the same as tax depreciation?

No. Appraisal depreciation measures market value loss from all causes as of an effective date. Federal tax depreciation is a statutory deduction that recovers the basis of qualifying business or income-producing property over assigned rules and periods. Tax depreciation can occur even when market value rises, and appraisal depreciation can differ substantially from accumulated tax deductions.

Is depreciation the same as amortization?

No. In mortgage finance, amortization is gradual loan repayment through scheduled payments. In accounting and tax, amortization can allocate the basis of certain intangible assets. Appraisal depreciation concerns loss in improvement value from physical, functional, and external causes. Always identify the subject area before applying a formula.

What is market extraction of depreciation?

Market extraction infers total accrued depreciation from sales. The analyst estimates the comparable's land value and cost new, subtracts land value from sale price to isolate the indicated improvement contribution, then compares that contribution with cost new. The gap can indicate total accrued depreciation if the data and assumptions are consistent.

Are these official PSI questions or tax advice?

No. The practice questions are original, and primary sources were checked through August 1, 2026. This page is exam education, not an appraisal, tax return position, depreciation schedule, engineering opinion, or legal advice. Actual appraisal and tax calculations require property-specific facts, current law, the correct effective date or tax year, and qualified professionals.

Primary sources

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