What form of depreciation is considered to occur outside the property?

The correct answer is economic depreciation. Economic depreciation refers to the loss in value of a property due to external factors that affect its desirability or value but are not related to the physical condition of the property itself. This can include changes in the local economy, such as a decline in the neighborhood, increased crime rates, or shifts in market demand that make a property less attractive in its current location.

This form of depreciation underscores how external market conditions or situational changes can negatively impact property values regardless of its physical attributes. For instance, if a new highway bypasses an area, properties that were once considered desirable may experience a decline in value due to decreased accessibility, showcasing the importance of understanding economic factors in property appraisals.

Other forms of depreciation, such as physical depreciation, pertain to the wear and tear on the property itself, and functional obsolescence refers to a loss of value due to changes in design or utility that render the property less useful. Capital, as a term, is often related to investments and assets rather than a specific type of depreciation. Therefore, economic depreciation specifically captures the impact of external factors on property value.