Depreciation in real estate refers to the gradual decrease in the value of a property over time due to wear and tear, aging, etc. Depreciation recognizes that buildings and other improvements have a limited useful life and will eventually need to be replaced or upgraded, and it spreads out the cost of these assets. The most important takeaway for investors is that depreciation is an “expense” that can be deducted from taxable income, allowing real estate owners to offset some of their tax liability.

Here’s why you should care about depreciation in real estate:

Tax Benefits: Depreciation allows property owners to deduct a portion of the property's cost from their taxable income each year. This reduces the amount of income that is subject to taxes. Therefore, it can be a powerful tool for preserving wealth.
Improves Cash Flow: By reducing taxable income, depreciation can improve cash flow by lowering the amount of taxes you owe each year.
Financial Planning: Understanding depreciation is crucial for financial planning and budgeting. It helps property owners estimate future tax liabilities accurately and make informed decisions about investments and property management.

And remember! While depreciation lowers the value of the property on paper for tax purposes, it doesn’t necessarily reflect the market value or potential appreciation of the property over time.