California Real Estate Practice Exam

Provision for the recapture of capital improvements is made in which of the following during an income evaluation approach to appraisal?

1. Condition of improvements, as observed

2. Cost of replacement new at installation date

3. Cost of replacement new today

4. Depreciation accrual

The correct answer is: Condition of improvements, as observed

In an income evaluation approach to appraisal, the provision for the recapture of capital improvements is reflected in the condition of improvements, as observed. This reflects the present state and functional utility of the improvements on the property and accounts for any enhancements made to the property that affect its income-generating potential. Evaluators assess how much value or utility these capital improvements currently retain compared to their initial investment. This option emphasizes the importance of how well the capital improvements are maintained and their condition at the time of evaluation. It directly influences the overall value of the property by considering how these improvements enhance its income-generating capabilities today. In contrast, the other options address different aspects. The cost of replacement new at installation date refers to historical costs, which do not account for depreciation and current market conditions. The cost of replacement new today provides an insight into current construction costs but does not directly reflect how these improvements are currently performing. Depreciation accrual focuses on the loss of value over time, which is relevant but does not specifically address the recapture of capital improvements' value as observed in their present condition.