In real estate, what does "depreciation" typically refer to?

Depreciation in real estate specifically refers to the decrease in a property’s value over time, primarily due to factors such as wear and tear, physical deterioration, or changes in the market conditions. As properties age, they may require repairs and maintenance that can be an indicator of declining value. Additionally, shifts in the local economy or real estate market can also impact a property's desirability and consequently its value.

Understanding depreciation is crucial for investors and appraisers alike as it affects their calculations of the property's worth and investment potential. For example, in calculating tax deductions for investment properties, owners must account for depreciation as it can significantly impact their taxable income. Thus, recognizing depreciation is an essential aspect of valuation in real estate and informs decisions regarding property management, investment opportunities, and financial planning.