Depreciation (Tax)
A federal tax deduction that lets owners of income-producing property recover the cost of buildings and improvements — not land — over a set recovery period. U.S. rules currently assign residential rental buildings a 27.5-year period. Depreciation reduces taxable income without a cash outlay, and prior deductions may be subject to recapture when the property is sold.
Related terms
1031 Exchange
A transaction under Section 1031 of the U.S. Internal Revenue Code that lets an investor defer capital gains tax by selling an investment property and reinvesting the proceeds in another like-kind investment property. The rules are strict: replacement property must generally be identified within 45 days of the sale and acquired within 180 days, with the funds held by a qualified intermediary in between. The tax is deferred, not eliminated — it carries into the new property’s basis.
Appreciation
An increase in a property’s market value over time, whether from market conditions, inflation, or improvements the owner makes (often called forced appreciation). Unlike cash flow, appreciation is unrealized until the property is sold or refinanced. Values can also fall — appreciation is a possibility, not a guarantee.