Appreciation, Depreciation, and Basis for the Texas Real Estate Exam

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Appreciation, depreciation, and basis sit in the investment corner of real estate math.

They can feel vague because the words are used in different ways.

Appreciation is usually simple:

Value went up.

Depreciation can mean:

Value went down.

or:

A tax deduction for certain income-producing property.

Basis means:

The owner's investment in the property for tax purposes.

On the Texas real estate exam, you do not need to become a tax professional. But you should understand enough to answer investment-property math questions without freezing.

This guide keeps the topic exam-safe:

• How to calculate appreciation.
• How to calculate depreciation as a value change.
• How to understand tax depreciation at a high level.
• How to calculate adjusted basis when the question gives the numbers.
• How basis affects gain or loss.
• How to avoid mixing land, building value, market value, book value, and tax basis.

Table Of Contents

• What does Pearson test?
• Core formula sheet
• Appreciation math
• Depreciation as value loss
• Tax depreciation basics
• Basis explained
• Adjusted basis
• Gain, loss, and investment return
• Land vs building allocation
• Worked examples
• Practice set
• Answer key and explanations
• Common mistakes
• FAQ

What Does Pearson Test?

Pearson VUE's Texas sales content outline lists "Investment" under Real Estate Math Calculations.

That investment subsection includes:

• Return on investment.
• Appreciation.
• Depreciation.
• Tax implications on investment.

So this topic is directly exam-relevant.

It can appear as:

The exam should give the numbers needed for calculations.

This article uses original educational examples, not copied exam questions.

Core Formula Sheet

Use this as your quick reference.

Convert percentages to decimals:

Appreciation Math

Appreciation means the property increased in value.

The basic formula is:

Appreciation amount = new value - old value

If a property was worth $400,000 and is now worth $460,000:

$460,000 - $400,000 = $60,000

The property appreciated by $60,000.

To find the appreciation rate:

Appreciation rate = appreciation amount / old value

$60,000 / $400,000 = 0.15

The appreciation rate is 15%.

New value from appreciation rate

If the question gives the original value and appreciation rate:

New value = old value x (1 + rate)

Example:

Original value: $350,000
Appreciation: 8%

$350,000 x 1.08 = $378,000

New value: $378,000.

Simple annual appreciation

If a question says a property appreciates by 4% over one year:

Value x 0.04

If it says simple appreciation for several years, use the original value unless the question says the value compounds.

Example:

Original value: $300,000
Simple appreciation: 4% per year for 3 years

Annual appreciation:

$300,000 x 0.04 = $12,000

Three years:

$12,000 x 3 = $36,000

New value:

$300,000 + $36,000 = $336,000

Compound appreciation

If the question says appreciation is compounded, apply the rate to the new value each period.

Example:

Original value: $300,000
Compound appreciation: 4% per year for 3 years

Year 1:

$300,000 x 1.04 = $312,000

Year 2:

$312,000 x 1.04 = $324,480

Year 3:

$324,480 x 1.04 = $337,459.20

New value: $337,459.20.

Do not compound unless the question says to.

Depreciation As Value Loss

Depreciation can mean a decline in value.

In appraisal and value questions, depreciation may refer to:

• Physical deterioration.
• Functional obsolescence.
• External or economic obsolescence.
• General decline in market value.

For exam math, the basic formula is:

Depreciation amount = old value - new value

If a building was worth $500,000 and is now worth $425,000:

$500,000 - $425,000 = $75,000

The property lost $75,000 in value.

To find the depreciation rate:

Depreciation rate = depreciation amount / old value

$75,000 / $500,000 = 0.15

The depreciation rate is 15%.

New value after depreciation

If a property depreciates by 10% from $480,000:

$480,000 x 0.10 = $48,000

$480,000 - $48,000 = $432,000

New value: $432,000.

Appreciation vs depreciation

The denominator for the percentage is usually the original value unless the question says otherwise.

Tax Depreciation Basics

Tax depreciation is different from market value loss.

The IRS explains that depreciation applies to most types of tangible property except land, including buildings, machinery, vehicles, furniture, and equipment, when the property meets the requirements for depreciation.

The key exam idea:

Land is not depreciable.

Buildings and certain improvements may be depreciable if used in a business or income-producing activity.

For Texas exam purposes, keep this clean:

Straight-line depreciation

The exam may give a simple straight-line problem.

Formula:

Annual depreciation = depreciable basis / useful life

Example:

Building value: $330,000
Useful life: 30 years

$330,000 / 30 = $11,000

Annual depreciation: $11,000.

IRS recovery periods to recognize

IRS Publication 946 lists GDS recovery periods including:

For the Texas real estate exam, do not assume you need to calculate detailed tax depreciation schedules unless the question gives the necessary facts.

Know the concept:

• Residential rental property and nonresidential real property have different recovery periods.
• Land is not depreciable.
• Depreciation can reduce adjusted basis.

Basis Explained

Basis is an owner's investment in property for tax purposes.

The IRS explains that basis is used to figure depreciation, amortization, depletion, casualty losses, and gain or loss on sale or disposition.

For exam purposes, the simple starting point is:

Original basis = cost or purchase price, plus certain acquisition costs if the question includes them

If a buyer purchases an investment property for $500,000 and the problem says the basis is the purchase price:

Original basis = $500,000

If the problem adds $8,000 of capitalized acquisition costs:

$500,000 + $8,000 = $508,000

Original basis: $508,000.

Cost basis vs market value

Basis is not always the same as market value.

In many simple exam questions, basis starts with purchase price.

But do not assume basis equals current market value.

Adjusted Basis

Adjusted basis is basis after increases and decreases.

The exam may give the formula directly, or give numbers that require you to build it.

Use:

Adjusted basis = original basis + increases - decreases

Common increases:

• Capital improvements.
• Certain settlement costs if stated.
• Legal or recording fees if the question says they are added to basis.
• Addition, roof replacement, major building improvement, or other capital item stated in the question.

Common decreases:

• Depreciation.
• Casualty loss or insurance reimbursement if stated.
• Other reductions stated in the question.

The IRS gives examples of basis increases such as capital improvements and states that basis may be reduced by deductions previously allowed or allowable for depreciation.

Adjusted basis example

Original basis: $500,000
Capital improvements: $40,000
Depreciation taken: $60,000

$500,000 + $40,000 - $60,000 = $480,000

Adjusted basis: $480,000.

Depreciation allowed or allowable

IRS Publication 946 says basis must be reduced by depreciation allowed or allowable, whichever is greater.

For the exam, this usually means:

If the question says depreciation is $50,000, subtract $50,000 from basis.

Do not turn a simple exam problem into a full tax return.

Gain, Loss, And Investment Return

Gain and loss are built from basis.

In simple exam math:

Gain = sale price - adjusted basis

Loss = adjusted basis - sale price

If adjusted basis is $480,000 and the property sells for $620,000:

$620,000 - $480,000 = $140,000

Gain: $140,000.

If adjusted basis is $480,000 and the property sells for $450,000:

$480,000 - $450,000 = $30,000

Loss: $30,000.

Sale price vs amount realized

Real tax calculations may use amount realized, which can involve selling expenses and other adjustments.

For exam math, use the exact wording:

• If the question says sale price, use sale price.
• If the question says net amount realized, use net amount realized.
• If the question gives selling costs and asks for net gain, subtract the selling costs if instructed.

Return on investment

Return on investment compares profit with investment.

ROI = profit / investment

Example:

Investment: $200,000
Profit: $40,000

$40,000 / $200,000 = 0.20

ROI: 20%.

Do not confuse appreciation rate with ROI. They can be related, but they are not always the same because leverage, loan payoff, expenses, income, and selling costs can change the investor's actual return.

Land Vs Building Allocation

This is one of the most important exam-safe tax depreciation ideas.

Land is not depreciable.

Buildings may be depreciable if they are used in a business or income-producing activity and meet the rules.

If a buyer purchases a rental property for $500,000 and the land is worth $100,000, the building allocation is:

$500,000 - $100,000 = $400,000

The depreciable basis is $400,000 if the question gives no other adjustments.

If the question asks for straight-line annual depreciation over 27.5 years:

$400,000 / 27.5 = $14,545.45

Annual depreciation: $14,545.45.

Land appreciation vs building depreciation

A real estate investment can have both:

• Land value appreciating.
• Building being depreciated for tax purposes.

That can feel contradictory, but it is normal.

The market value of the overall property may rise while the building is still depreciated for tax purposes.

For exam purposes, separate the concepts.

Worked Examples

1. Appreciation Amount

A property was purchased for $360,000 and is now worth $414,000. How much did it appreciate?

$414,000 - $360,000 = $54,000

Answer: $54,000.

2. Appreciation Rate

Using the same facts, what is the appreciation rate?

$54,000 / $360,000 = 0.15

Answer: 15%.

3. New Value From Appreciation

A property worth $420,000 appreciates by 6%. What is the new value?

Appreciation:

$420,000 x 0.06 = $25,200

New value:

$420,000 + $25,200 = $445,200

Answer: $445,200.

Shortcut:

$420,000 x 1.06 = $445,200

4. Depreciation As Value Loss

A building was valued at $800,000 and is now valued at $680,000. What is the depreciation amount?

$800,000 - $680,000 = $120,000

Answer: $120,000.

5. Depreciation Rate

Using the same facts, what is the depreciation rate?

$120,000 / $800,000 = 0.15

Answer: 15%.

6. Annual Straight-Line Depreciation

A rental building has a depreciable basis of $330,000 and a recovery period of 27.5 years. What is the annual straight-line depreciation?

$330,000 / 27.5 = $12,000

Answer: $12,000.

7. Land Allocation

An investor buys a rental property for $600,000. Land is valued at $150,000. What amount is allocated to the building for depreciation before other adjustments?

$600,000 - $150,000 = $450,000

Answer: $450,000.

8. Adjusted Basis

An investor's original basis is $600,000. The investor adds $50,000 of capital improvements and has $80,000 of depreciation. What is adjusted basis?

$600,000 + $50,000 - $80,000 = $570,000

Answer: $570,000.

9. Gain From Adjusted Basis

A property sells for $750,000. Adjusted basis is $570,000. What is the simplified gain?

$750,000 - $570,000 = $180,000

Answer: $180,000.

10. Net Gain With Selling Costs

A property sells for $750,000. Adjusted basis is $570,000. Selling costs are $45,000. If the question asks for gain after selling costs, what is the gain?

Net amount realized:

$750,000 - $45,000 = $705,000

Gain:

$705,000 - $570,000 = $135,000

Answer: $135,000.

Practice Set

Try these without looking at the answer key.

1. Appreciation Amount

A property was worth $500,000 and is now worth $575,000. How much did it appreciate?

2. Appreciation Rate

Using the same facts, what is the appreciation rate?

3. New Value

A property worth $640,000 appreciates by 5%. What is the new value?

4. Simple Annual Appreciation

A property worth $300,000 appreciates by 3% per year for 4 years using simple appreciation. What is the new value?

5. Depreciation Amount

A building was worth $900,000 and is now worth $810,000. What is the depreciation amount as value loss?

6. Depreciation Rate

Using the same facts, what is the depreciation rate?

7. Building Allocation

An investor buys a rental property for $720,000. Land is valued at $180,000. What is the building allocation before other adjustments?

8. Straight-Line Depreciation

Using the building allocation from question 7, what is annual straight-line depreciation over 27.5 years?

9. Adjusted Basis

Original basis is $720,000. Capital improvements are $60,000. Depreciation is $90,000. What is adjusted basis?

10. Simplified Gain

Adjusted basis is $690,000. Sale price is $850,000. What is the simplified gain?

11. Net Gain With Selling Costs

Adjusted basis is $690,000. Sale price is $850,000. Selling costs are $50,000. If the question asks for gain after selling costs, what is the gain?

12. Loss

Adjusted basis is $500,000. Sale price is $455,000. What is the loss?

13. ROI

An investor put $250,000 into a project and earned a $62,500 profit. What is the return on investment?

14. Land Is Not Depreciable

A property has a total basis of $550,000. Land is allocated $110,000. What is the depreciable building basis before other adjustments?

15. Depreciation Reduces Basis

An investor has original basis of $500,000 and depreciation of $75,000. No other adjustments are given. What is adjusted basis?

Answer Key And Explanations

1. Appreciation Amount

$575,000 - $500,000 = $75,000

Answer: $75,000.

2. Appreciation Rate

$75,000 / $500,000 = 0.15

Answer: 15%.

3. New Value

$640,000 x 1.05 = $672,000

Answer: $672,000.

4. Simple Annual Appreciation

Annual appreciation:

$300,000 x 0.03 = $9,000

Four years:

$9,000 x 4 = $36,000

New value:

$300,000 + $36,000 = $336,000

Answer: $336,000.

5. Depreciation Amount

$900,000 - $810,000 = $90,000

Answer: $90,000.

6. Depreciation Rate

$90,000 / $900,000 = 0.10

Answer: 10%.

7. Building Allocation

$720,000 - $180,000 = $540,000

Answer: $540,000.

8. Straight-Line Depreciation

$540,000 / 27.5 = $19,636.36

Answer: $19,636.36.

9. Adjusted Basis

$720,000 + $60,000 - $90,000 = $690,000

Answer: $690,000.

10. Simplified Gain

$850,000 - $690,000 = $160,000

Answer: $160,000.

11. Net Gain With Selling Costs

Net amount:

$850,000 - $50,000 = $800,000

Gain:

$800,000 - $690,000 = $110,000

Answer: $110,000.

12. Loss

$500,000 - $455,000 = $45,000

Answer: $45,000 loss.

13. ROI

$62,500 / $250,000 = 0.25

Answer: 25%.

14. Land Is Not Depreciable

$550,000 - $110,000 = $440,000

Answer: $440,000.

15. Depreciation Reduces Basis

$500,000 - $75,000 = $425,000

Answer: $425,000.

Common Mistakes

Mistake 1: Mixing Market Depreciation With Tax Depreciation

Depreciation can mean loss in market value, or it can mean a tax deduction.

Read the question.

If it says value dropped, use value-loss math.

If it says tax depreciation or adjusted basis, use basis math.

Mistake 2: Depreciating Land

Land is not depreciable for tax purposes.

If a question gives total property cost and land value, subtract land before calculating building depreciation.

Mistake 3: Using Current Market Value As Basis

Basis is not automatically current market value.

In simple questions, basis often starts with cost or purchase price.

Use the basis number given in the problem.

Mistake 4: Forgetting That Improvements Increase Basis

Capital improvements usually increase basis when the question tells you to treat them that way.

Do not treat a major addition the same as routine maintenance unless the question says so.

Mistake 5: Forgetting That Depreciation Reduces Basis

Depreciation can reduce adjusted basis.

If original basis is $500,000 and depreciation is $75,000, adjusted basis is $425,000 before other adjustments.

Mistake 6: Confusing Appreciation Rate With ROI

Appreciation rate compares value change to original value.

ROI compares investor profit to investor investment.

Leverage, income, expenses, and selling costs can make ROI different from appreciation.

Mistake 7: Compounding When The Question Does Not Say To

Only compound appreciation if the question says annual appreciation is compounded or asks for compound growth.

Otherwise, many exam math questions expect simple percent change.

How To Study This Topic

Use three passes.

Pass 1: Master Value Change

Practice:

• Old value to new value.
• Appreciation amount.
• Appreciation rate.
• Depreciation amount.
• Depreciation rate.

This is pure percent math.

Pass 2: Master Basis

Write this formula until it feels automatic:

Adjusted basis = original basis + improvements - depreciation

Then add other increases or decreases only when the question gives them.

Pass 3: Master Investment Results

Practice:

• Gain from adjusted basis.
• Loss from adjusted basis.
• Net gain after selling costs.
• ROI from profit and investment.
• Building allocation when land is listed separately.

This topic rewards careful labeling more than speed.

Where This Fits In The Texas Math Cluster

Appreciation, depreciation, and basis connect to investment math, valuation, tax implications, and return calculations.

FAQ

What is appreciation in real estate math?

Appreciation is an increase in value. The appreciation amount is new value minus old value. The appreciation rate is the appreciation amount divided by the old value.

What is depreciation in real estate math?

Depreciation can mean a decline in value, or it can mean a tax deduction for certain income-producing property. On the exam, read the wording carefully to know which meaning is being used.

Is land depreciable?

No. For tax depreciation, land is not depreciable. If a property includes land and building value, subtract land before calculating building depreciation when the question asks for depreciable basis.

What is basis?

Basis is the owner's investment in property for tax purposes. In simple exam questions, basis often starts with cost or purchase price, then changes for improvements, depreciation, or other adjustments stated in the question.

What is adjusted basis?

Adjusted basis is original basis after increases and decreases. A common exam formula is original basis plus capital improvements minus depreciation.

How does depreciation affect adjusted basis?

Depreciation usually reduces adjusted basis. If the question gives depreciation, subtract it unless the problem says otherwise.

How do I calculate gain from basis?

In simplified exam math, gain equals sale price minus adjusted basis. If the question gives selling costs and asks for net gain, subtract selling costs before comparing to adjusted basis.

Is appreciation the same as return on investment?

No. Appreciation measures change in property value. ROI measures profit compared with the investor's investment. Financing, rent, expenses, selling costs, and taxes can make ROI different from appreciation.

Should I practice this in the app?

Yes. This topic is easy to mix up because the same words can mean market value, tax basis, or investment return. The Texas real estate exam prep app gives you original appreciation, depreciation, adjusted basis, gain, loss, land allocation, and ROI practice with explanations. Native Texas exam prep. Original questions. No copied exam questions. Not affiliated with TREC or Pearson VUE. Not a 180-hour pre-license course or a pass guarantee.

Are these copied exam questions?

No. The examples and practice questions in this article are original educational practice questions. The Texas real estate exam prep app also uses original questions. Native Texas exam prep. Original questions. No copied exam questions. Not affiliated with TREC or Pearson VUE. Not a 180-hour pre-license course or a pass guarantee.

Verification Note

This article was verified against the current Pearson VUE Texas real estate content outline, the Pearson VUE candidate handbook, IRS Publication 551, and IRS Publication 946.

It is for educational exam prep, not tax, legal, accounting, appraisal, or investment advice. Actual basis, depreciation, gain, loss, recapture, exclusions, and reporting rules can be more complex than exam math and may depend on the taxpayer's facts. For the Texas real estate exam, use the numbers and instructions in the question.

Sources

• Pearson VUE: Texas Real Estate Content Outlines
• Pearson VUE: Texas Real Estate Candidate Handbook
• IRS Publication 551: Basis of Assets
• IRS Publication 946: How To Depreciate Property