Depreciation in real estate is calculated based on which factor?

The calculation of depreciation in real estate typically focuses on the cost of the building alone. Depreciation is a method of allocating the cost of a tangible asset over its useful life, resulting in a decrease in value due to wear and tear, aging, or obsolescence. In real estate, while the land itself does not depreciate—because land generally maintains or increases in value—the building or improvements on that land do depreciate over time.

When considering the factors affecting depreciation, it's essential to understand that it is applied specifically to the structures rather than the land, making the cost of the building the relevant factor in this context. This practice reflects the accounting and tax methodologies used in real estate, where the building's costs are depreciated over a set period to account for its decreasing value as it ages.

Market demand trends, the cost of the land, and current market value of the property can influence property valuation and investment decisions but are not directly used in calculating the depreciation of the building itself. Hence, the focus rests on the cost associated with the building for depreciation purposes.