Depreciation is divided into which of the following categories?

Depreciation in real estate is essential for understanding asset value over time, and it is categorized into three primary types: economic, functional, and physical.

Economic depreciation refers to the loss in value due to external factors affecting the property, such as changes in the local economy or neighborhood conditions that negatively impact property desirability or market value.

Functional depreciation occurs when a property becomes less valuable due to outdated designs, layouts, or features that do not meet current market demands or buyer expectations. For example, a home with an outdated kitchen may depreciate functionally because potential buyers prefer modern amenities.

Physical depreciation, on the other hand, involves the deterioration of the property due to wear and tear over time. This type of depreciation can be attributed to various factors, such as age, weather conditions, and lack of maintenance.

These three categories provide a comprehensive framework for evaluating how different factors contribute to a property's overall value decline. By understanding these distinctions, property managers and investors can make informed decisions regarding maintenance, renovations, and financial planning for their assets.