In real estate, Depreciation refers to the loss in value of a property over time due to factors such as physical wear and tear, aging, functional obsolescence (outdated design or features), or economic obsolescence caused by external influences like neighborhood decline or market conditions. This concept is commonly used in appraisal to explain why an older property may be worth less than a newer or more efficient one.
In accounting and tax contexts, depreciation also describes the method by which a property owner deducts a portion of an income-producing asset’s value each year for tax purposes. This tax depreciation is based on IRS rules and assigned depreciable lives, and it applies only to the improvements, not the land. Although tax depreciation reduces taxable income, it does not necessarily reflect the property’s actual market value, which may increase or decrease independently.
