Depreciation
A reduction in the value of an improvement (building) over time due to physical deterioration, functional obsolescence, or external factors.
Full Definition
In real estate, depreciation has two distinct meanings. For appraisal purposes, depreciation is a loss in property value from any cause: physical deterioration (wear and tear, deferred maintenance), functional obsolescence (outdated floor plan, outdated kitchen — curable or incurable), and external (economic) obsolescence (factors outside the property like a new highway or declining neighborhood — always incurable). For tax purposes, depreciation is a non-cash deduction allowing income property owners to deduct the cost of improvements (not land) over their useful life: 27.5 years for residential, 39 years for commercial, using the straight-line method. Tax depreciation applies even when the property is appreciating in market value.
Real-World Example
A rental property cost $400,000 with $80,000 attributed to land. Annual tax depreciation = ($400,000 − $80,000) ÷ 27.5 = $11,636/year — a non-cash deduction that reduces taxable income.
How Depreciation Appears on the Real Estate Exam
Common question types, tested concepts, and what to watch out for
Know the three types of depreciation for appraisal. Know that land is NEVER depreciated for tax purposes. Residential useful life = 27.5 years; commercial = 39 years. Straight-line method is required.
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