Depreciation
Definition
The decline in an asset's value over time. A new car depreciates 20% in year one. Real estate usually appreciates, but improvements depreciate. For tax purposes, depreciation reduces your taxable income if you own rental property.
Why It Matters
Understanding depreciation helps you make better buying decisions. Cars are terrible investments because they depreciate so fast. Real estate often appreciates. Knowing this shapes your wealth-building strategy.
Example
Buy a car for $30,000. In year one, it's worth $24,000. By year 5, $12,000. But the $10,000 in real estate improvements (new roof, solar) can depreciate, reducing your rental property taxes by $200-400 annually.