What does 'depreciation' in real estate typically reflect?

Depreciation in real estate commonly refers to the decrease in the property's value over time primarily due to wear and tear, as well as age and other factors that can diminish the property's overall condition. This concept is particularly important in accounting, tax considerations, and valuation, as it allows property owners to account for the loss of value in their investment over time.

In the context of real estate, depreciation not only considers physical deterioration but can also encompass functional obsolescence and economic obsolescence. While some factors, such as market fluctuations and property improvements, can temporarily influence property values, they do not reflect the fundamental nature of depreciation which specifically addresses the decline in value from use and age. Understanding depreciation is crucial for real estate professionals as it impacts investment decisions, tax deductions, and property assessments.