What is the relationship between depreciation and a property's economic life?

The relationship between depreciation and a property's economic life is best understood through the concept that depreciation reflects the reduction in value of an asset over time, which is influenced by its economic life. Economic life refers to the time period during which a property is expected to generate economic benefits, primarily through rental income or resale value.

When we say that depreciation indicates the remaining economic life of a property, it highlights how the amount of depreciation accounted for is a direct measure of that property's usage and wear and tear. As a property ages and experiences various factors that diminish its value—such as deterioration or functional obsolescence—depreciation increases, signaling that the property is approaching the end of its useful economic life. Essentially, tracking depreciation can provide insight into how much longer a property might continue to generate income before it is deemed no longer economically viable.

In essence, understanding depreciation in the context of economic life allows investors and property managers to make informed decisions regarding maintenance, renovation, and ultimately the timing for selling or replacing properties in their portfolios.