What is the purpose of depreciation in property valuation?

Depreciation in property valuation serves to represent the loss of value over time, which is essential for providing an accurate assessment of a property’s current worth. As properties age and experience wear and tear, their value typically decreases. This reduction in value can be due to various factors, such as physical deterioration, economic obsolescence, or functional obsolescence.

By incorporating depreciation into property valuation, appraisers and investors gain a clearer understanding of how much a property has likely diminished in value since its purchase or construction. This insight is crucial for making informed decisions regarding buying, selling, or investing in real estate.

Options that speak to increasing property value, reducing tax liabilities, or calculating asset replacement costs do not directly relate to the defined concept of depreciation in property valuation. Although aspects like tax benefits can result from depreciation, this is more of a financial advantage rather than the core purpose of tracking depreciation itself.