The loss or decrease in property value because of obsolescence, wear and tear, economic factors or age. Depreciation has functional, economic and tax elements. In appraisals, the three classes of depreciation used in the cost approach are physical deterioration, functional obsolescence and economic obsolescence. Such depreciation can be further labeled curable or incurable.
Under standard actual cash value coverage, insurance policies will deduct depreciation from original cost when calculating reimbursements. For tax deduction purposes, however, depreciation can only be taken on property used in a business, trade or income generation. Personal residences cannot claim depreciation deductions. Depreciation deductions can be calculated with either the straight line method or accelerated cost recovery system. For more information, see the "Deducting Depreciation" and "Investment Property Tax Advantages" articles in the "Real Estate Investing" section.
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