What is meant by depreciation in real estate?

Depreciation in real estate refers specifically to the reduction in value of a property over time, primarily due to factors such as wear and tear, obsolescence, and other physical or economic influences. Understanding depreciation is essential for both investors and property owners as it impacts tax calculations and asset valuations.

The option that discusses the difference between the cost of improvements and their current value touches on a concept related to assessing property value but does not accurately capture the essence of depreciation itself. While improvements can affect a property's current value, depreciation focuses on the decline in value over time due to the factors mentioned earlier.

In this context, the correct understanding of depreciation aligns with how properties age and deteriorate, leading to reduced market value. This is crucial for real estate professionals, as it affects investment decisions, tax considerations, and financial reporting for properties.