What does 'depreciation' refer to in real estate?

Depreciation in real estate primarily refers to the decrease in property value over time due to factors such as wear and tear, obsolescence, or other economic factors. This concept acknowledges that as a property ages, it may require repairs or may not be as desirable to buyers or renters, which can lead to a drop in its market value. In financial accounting, depreciation is also used to spread the cost of a physical asset over its useful life, reflecting the loss in value as time progresses and the asset ages.

On the other hand, an increase in property value over time due to improvements relates to appreciation, which is the opposite of depreciation. Rental income pertains to cash flow generated by a property and does not indicate changes in the value of the property itself. The potential selling price of a property can fluctuate based on various market conditions, but it does not directly define depreciation either. Thus, the definition surrounding depreciation focuses specifically on the decline in value due to aging and other detriments.