Appraisal of commercial property value for determining tax liability is most often based on the property's:

• A. Current market value
• B. Ability to generate rental income
• C. Tax assessment history
• D. Replacement cost

Answer: (B)

For commercial properties, the value used to determine tax liability is driven by the income they can generate. Appraisers commonly use the income capitalization approach, which estimates net operating income (rents minus operating expenses) and then converts that income into value by applying a capitalization rate. This method reflects how investors actually value such properties: based on the ongoing cash flow the property can produce.

That’s why the ability to generate rental income is the best basis for appraisal in this context. Market value, replacement cost, or past tax assessments may influence perceptions of value, but they don’t directly capture the ongoing income-generating potential that investors rely on for commercial property, which is why they’re less central to tax valuation. For example, value equals NOI divided by the cap rate, linking income directly to value.