Which of the following is deducted from potential gross income to determine effective gross income when appraising income property?

To determine effective gross income (EGI) when appraising income property, potential gross income (PGI) must first account for expected losses, which primarily involve vacancy and collection losses. These losses refer to the income that property owners anticipate losing due to vacant units and tenants who may fail to pay their rent.

Vacancy and collection losses reflect the reality that not all available rental units will be occupied at all times, and some tenants may default on their payments. Therefore, to arrive at a more realistic income figure—one that accounts for these inevitable losses—the deduction of vacancy and collection losses from the potential gross income is essential.

In contrast, debt service, property taxes, and operating expenses are not deducted when calculating effective gross income. Instead, these costs are considered later in the evaluation process to determine overall profitability and cash flow from the property. Thus, the calculation of EGI starts with PGI and then deducts vacancy and collection losses to provide a clearer picture of the income that will actually be generated from tenants.