A good definition of depreciation is reduction in an asset’s value due to the passing of time or wear and tear from usage. Many times we think of depreciation in relation to a vehicle. It’s often been said that once a new car is bought and driven off the dealer’s lot, depreciation begins. However, this is different when referring to real estate. Many times a real estate purchase, if maintained, appreciates in value over time. Still, there are times—in a depressed economy or from lack of maintenance—when a home or property does depreciate.
It’s good to consider several factors before buying a property: location, condition of property and/or structures, price, etc. Although there are many factors that you cannot control, this will help you to keep your property from realizing depreciation. For instance, if a hurricane destroys your property and your community, you will realize depreciation because the property is no longer as valuable as it once was. A depressed economy may also cause depreciation in real estate.
There are several kinds of depreciation:
Functional depreciation: represents the loss of value caused by outdated or poor design. There are two types of functional depreciation, curable and incurable. Curable depreciation is the cost of remodeling or adding additional rooms, doorways, or enhancements, etc. Incurable depreciation is really a matter of judgment as when a certain style of housing goes out of style.
Physical depreciation: describes the accumulated loss in value caused by physical wear and tear that has occurred since the date the building was completed. This type of depreciation is in the owner’s control in that it includes worn out items that can be replaced such as carpeting, paint, broken appliances. Like functional depreciation, there are both curable and incurable physical depreciations that may occur. Some repairs or replacements would not be worth the cost required considering the value and the life of the structure; therefore, it would be considered incurable.
The best way to avoid depreciation of property is to fix things as needed. Never let a property fall into disrepair. Also, a home that is lived in tends to fair better than one that is left empty for a great amount of time.