Real Estate Depreciation

Depreciation of real estate is a loss in value to a property due to any cause. Accrued depreciation is depreciation that has already occurred. This loss in value is equal to the difference between the replacement cost new of the improvements and their market value. Depreciation may be due to the physical wearing out of a building, functional problems of the building, or locational problems that affect the property. After estimating the accrued depreciation you can then deduct it from the replacement (or reproduction) cost of the building(s) on a property. The resulting figure is the depreciated cost of the improvements.

“The entrance to a mansion with a beautiful garden seen through the fence” by Matt Jones on Unsplash

Types of Depreciation

Adverse physical, functional, and locational influences cause property improvements to depreciate. There are three types of depreciation: physical deterioration, functional obsolescence, and external obsolescence. Physical deterioration of a building and its equipment includes physical wear and tear, disintegration, decay or rot, or physical damage of any kind caused by the elements. Functional obsolescencerefers to deficiencies, superadequacies, or simply undesirable features found in a building. External obsolescence is attributable to external adverse conditions that affect a property.

A property may suffer from any combination of the three types of depreciation, or it may not suffer from any…