Tax glossary

Depreciation

Depreciation — what it means, how it works, and a real example, explained without the jargon.

What is Depreciation?

Depreciation is the tax deduction for wearing out a business asset over time — you write off its cost gradually instead of all at once.

How it works

The IRS assigns each asset class a useful life (5 years for equipment, 27.5 for residential rental buildings), and you deduct a portion each year. It's a paper expense: you already spent the cash, but the deduction keeps arriving annually.

A quick example

Buy a $25,000 piece of equipment on a 5-year schedule and you deduct roughly $5,000 a year, sheltering that much income even though no new money leaves your account.

What people get wrong

Depreciation gets "recaptured" — taxed back — when you sell the asset for more than its depreciated value. Plan for that bill, especially when selling a rental property.

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Frequently asked questions

What does Depreciation mean?

Depreciation is the tax deduction for wearing out a business asset over time — you write off its cost gradually instead of all at once.

How does Depreciation work?

The IRS assigns each asset class a useful life (5 years for equipment, 27.5 for residential rental buildings), and you deduct a portion each year. It's a paper expense: you already spent the cash, but the deduction keeps arriving annually.

What's the most common mistake with depreciation?

Depreciation gets "recaptured" — taxed back — when you sell the asset for more than its depreciated value. Plan for that bill, especially when selling a rental property.