Definition of "Abstraction Method"
The abstraction method is a valuation procedure used to determine the land value relative to the total market value of the property. The abstraction approach is most often used when there are no vacant parcels of land for sale in an area to figure out which is the value of the land when the property built on it is taken out of consideration. This method of evaluation is the most commonly used approach to evaluate the land value for tax purposes. It is also most often used in urban areas with little to no vacant lots for sale, also known as the depreciated replacement cost approach to valuation. It can also be referred to as the extraction method of valuation of land.
Why is the Abstraction Method Used?
In the United States of America, 29 of the 50 states require different values for buildings and lands for tax purposes, which is where the abstraction approach comes into play. This is one of the ways in which residual land that pertains to a property can be evaluated fairly. This method isn’t used in areas where there are ample vacant land sales that can be used for comparison, but only where the list of vacant lands for sale is limited or nonexistent.
When calculating the value of residual land that pertains to a property, you must consider the property itself and any improvements affecting its value. This method does this by taking into account the upgrades, replacement costs of the property, or any other improvements that affect the land like pools, landscaping, etc., or the property.
Other methods that can be used to evaluate the value of The reason for the abstraction method, aside from the basic tax purposes, is to determine the best uses of a particular site in regards to zoning laws, return of investments, productivity, and what are the actual physical possibilities for the site. Determining the most accurate land value in an urban situation where there are no vacant lands for sale to compare uses the abstraction method. The method begins with the market value of the entire property and sales of properties in the neighborhood. The abstraction method subtracts the value required to replace the improvements by considering the market’s depreciation. The depreciation is the factor that influences the validity of this approach. For this reason, the abstraction method can not provide an accurate land value of a site where a historical building is located as depreciation can not be accurately calculated. The abstraction method is used mostly for new structures. The abstraction method also needs to take the location of the land into account. In general, the location affects the market value of a property and, by extension, the land value. In determining the land value on a particular property,the abstraction method requires the following steps: Example: A lot of 6,500 sq. ft with a 500 sq. ft single-family residence on it. The property is sold for $83.000, and the residence has been estimated to cost $61,000 with a depreciation of $20,000. Sale price of property ……………………...............………………..................…….…...……….…… $83,000 Depreciated value of the building (improvements and investments): Building ………..$61,000 Depreciation …..$20,000 Depreciated value of building ………………….…………………….................……...........…...…..$41,000 Resulting remaining land value (depreciated value subtracted from sale price) …$42,000 Divide value by remaining lot size of 6,000 sq. ft ………………………….........................…$7/sq. Ft Multiply by total lot size of 6,500 sq. ft……………………………..........................…………….$45,000 Through the abstraction method, the land value is estimated at $45,500.How does the Abstraction Method Work?
How is the Abstraction Method Applied?
Have a question or comment? We're here to help.