Depreciation
The decline in an asset's value over time from age and use — and, for businesses, the tax deduction that tracks it.
What Depreciation means
Depreciation is the loss of value an asset suffers as it ages and wears out. For consumers the clearest example is a car, which typically sheds 20% or more of its value in the first year and roughly 60% within five.
That curve is why buying a lightly used vehicle is so often better value than buying new: the first owner absorbed the steepest part of the decline.
For businesses and rental property owners, depreciation is also an accounting concept. The IRS lets you deduct a portion of an asset's cost each year over its useful life, which reduces taxable income without requiring new cash outlay. Residential rental property, for instance, is depreciated over 27.5 years.
Depreciation deductions are generally recaptured and taxed when the asset is sold, so the benefit is partly a deferral rather than a permanent saving.
Related terms
Capital Gains
The profit from selling an asset for more than you paid, taxed at a lower rate if you held it longer than a year.
Net Worth
Everything you own minus everything you owe — the single clearest measure of your overall financial position.
Tax Bracket
An income range taxed at a particular rate — only the income inside that range is taxed at it, not your whole salary.
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