In real estate investment, what does 'depreciation' (for tax purposes) allow an investor to do?

DEPRECIATION (cost recovery) FOR TAX PURPOSES: Allows an investor in INCOME-PRODUCING property to DEDUCT a portion of the cost of the IMPROVEMENTS (buildings/structures — NOT the land, which is not depreciable) each year as a non-cash expense, reducing TAXABLE INCOME.

Key points: Only IMPROVEMENTS depreciate, not land; it's a 'paper' (non-cash) deduction — the investor doesn't spend money but gets a tax deduction; RECOVERY PERIODS (IRS): Residential rental property is depreciated over 27.5 years; commercial property over 39 years (straight-line).

Benefit: Reduces taxable income from the property, sheltering some cash flow from taxes — even while the property may be APPRECIATING in actual market value (tax depreciation ≠ actual value decline).

Depreciation recapture: When the property is sold, previously claimed depreciation is 'recaptured' and taxed (at a special rate) — unless deferred via a 1031 exchange; ONLY FOR INVESTMENT/BUSINESS property (not a personal residence); depreciation is a major tax advantage of real estate investment — a non-cash deduction on improvements that shelters income; understanding depreciation (improvements only, set recovery periods, recapture on sale) is important investment/tax knowledge for brokers tested on the national exam.