Oregon 30-Hour Real Estate Law Practice Test

What type of depreciation in investments is associated with cost recovery?

1. Market depreciation

2. Structural depreciation

3. Tax depreciation

4. Investment depreciation

The correct answer is: Tax depreciation

The concept of cost recovery in investments is primarily linked to tax depreciation. Tax depreciation allows investors to recover the cost of an asset over time through tax deductions, effectively reducing the taxable income. This can be particularly advantageous in real estate, where property owners can depreciate the value of their buildings, improvements, and certain fixtures. Tax depreciation is calculated based on various methods, such as the straight-line method, which evenly spreads the depreciation over the useful life of the asset, or the declining balance method, which provides larger deductions in the earlier years. Other forms of depreciation do not directly relate to cost recovery in the same manner. Market depreciation reflects changes in market conditions and property values, while structural depreciation refers to loss in value due to wear and tear of the physical structure itself. Investment depreciation is a broader term that may imply various types of depreciation related to investments but lacks the specific tax implications associated with cost recovery. Thus, tax depreciation is the most relevant concept when discussing cost recovery in investments.