Definition
The decline in an asset's value over time from age, wear, and obsolescence, and, in tax terms, the deduction that lets a business or landlord write off the cost of a long-lived asset gradually over its useful life instead of all at once. A car losing value in the driveway and a rental property producing a paper loss on a tax return are the same word used two ways.
Why it matters
For net worth, depreciation is why a car or electronics are shrinking assets, not investments. For taxes, depreciation deductions can shelter rental income and business profit from tax today, though the IRS recaptures some of that benefit when the asset is sold.
Example
A $35,000 new car might be worth about $21,000 after three years, a $14,000 loss that shows up directly in net worth. Separately, a landlord who buys a $300,000 rental with $60,000 of land value depreciates the $240,000 building over 27.5 years, deducting about $8,700 a year against rental income without spending a dollar.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.