What does the term “depreciation” refer to in real estate?

Depreciation in real estate specifically refers to the decrease in value of a property over time due to various factors, including wear and tear or physical deterioration, as well as obsolescence, whether it's functional or economic.

This phenomenon is significant in real estate as it impacts the overall market value and can affect a property owner's financial decisions. For instance, if a property becomes less desirable due to outdated features or a decline in the surrounding neighborhood, its value can diminish. Furthermore, depreciation is a key concept for tax purposes; property owners may be allowed to deduct depreciation from their taxes, reflecting an investment that loses value over its useful life.

Understanding depreciation helps real estate professionals and investors assess property conditions and potential future value, guiding them in making informed decisions regarding buying, selling, or investing in real estate.