What does the term depreciation refer to in real estate?

The term depreciation in real estate refers to a reduction in value for any reason. This concept encompasses various factors that can lead to a decrease in the market value of a property. These factors include physical wear and tear, economic obsolescence, or a change in the surrounding area that affects property desirability or usability.

Understanding depreciation is crucial for real estate professionals, as it can influence investment decisions, tax liabilities, and property valuations. For instance, over time, properties often naturally wear down and may require repairs or updates, which can impact their overall value. This reduction shows how real estate investment is dynamic and influenced by both internal and external factors.

The other options presented do not accurately capture the essence of depreciation. An increase in property value, for example, aligns with appreciation, while a tax deduction on property pertains to tax benefits rather than value reduction.