How Do I Factor in Depreciation in Buying an Apartment?
In normal usage, depreciation is the decrease in an asset's value due to any cause. In financial accounting, depreciation refers to a procedure to represent the constant decrease in an asset's value due to its usage. Depreciation expense across an asset's useful lifespan is collected into an account called accumulated depreciation and represents the total loss of value in the asset due to its usage. Since buyers consider the current state of used assets when negotiating prices with sellers, depreciation is a factor of the final price.
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Instructions
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Ask the seller about the apartment's current accumulated depreciation. If that is not possible, ask about details that can be used to approximate its accumulated depreciation using a standard depreciation method. Among these details should be the apartment's original price which doubles as its original fair market value, the apartment's original estimated useful lifespan, and how much of that lifespan has been used so far.
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Go through the apartment to examine its condition. Hire an expert if need be to assess its level of wear and tear, since per period depreciation expense is only an estimate.
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Compare the apartment's original purchase cost and its estimated accumulated depreciation in order to derive its approximate current fair market value. Assuming that its original purchase price was a fair assessment of the apartment's then true value, subtract the estimate of its lost value from its original purchase price in order to estimate its current fair value.
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Tips & Warnings
An asset's fair market value is not necessarily the same as its purchase price. For example, an apartment that has received extensive renovations since its purchase will likely be worth more than at time of its purchase. The value of renovations tends to be added to the value of preexisting assets.
References
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