What does depreciation in real estate terms refer to?

Depreciation in real estate does indeed refer to a decrease in property value over time. This concept is important for real estate investors and property owners to understand, as it affects both the market value of a property and the taxable income reported on their financial statements.

There are various factors that contribute to depreciation, including physical deterioration, changes in the local real estate market, and obsolescence due to outdated features or competing properties. For example, a property that may have been highly desirable in the past might lose value if new developments in the area provide better options for buyers or renters.

Understanding depreciation assists real estate professionals in making informed decisions regarding property investment, selling strategies, and when to make necessary improvements to a property to retain or increase its value. This aspect of real estate is especially significant for tax purposes, as property owners can often deduct depreciation from their taxable income, which can lead to substantial savings.