What does depreciation in real estate generally refer to?

Depreciation in real estate primarily refers to the reduction in value of a property over time, often as a result of physical deterioration, aging, or wear and tear. This concept is fundamental in property appraisal, as it helps appraisers determine the current market value of a property by accounting for its condition and the economic wear it has undergone throughout its life cycle. The physical aspects of a property, including structural issues, outdated features, and general deterioration, contribute to this loss of value.

Recognizing depreciation allows appraisers to make adjustments in their valuation methods, reflecting not just current market conditions but also the intrinsic status of the property itself, ensuring a more accurate and fair assessment of its worth. In the context of real estate, this understanding is critical for property owners, investors, and appraisers to make informed decisions based on the actual value of a property rather than its original purchase price or theoretical market trends.