Oregon 30-Hour Real Estate Law Practice Test

Which statement about investors and tax depreciation is true?

1. Investors cannot depreciate appreciating assets

2. Investors can depreciate an appreciating asset

3. Depreciation is only applicable to commercial property

4. Tax depreciation benefits only homeowners

The correct answer is: Investors can depreciate an appreciating asset

The statement that investors can depreciate an appreciating asset is accurate within the context of tax law and real estate investment. In the realm of tax depreciation, the classification of an asset does not hinge on whether it appreciates or depreciates in value over time. Rather, depreciation is a method allowed by the IRS that enables property owners, including investors, to recover the cost of an asset over its useful life for tax purposes. In real estate, most types of property can be depreciated, including residential rental properties and commercial properties, despite fluctuations in market value. This means that an investor can take a tax deduction for the wear and tear on an investment property over time, even if the property's market value is increasing. The other statements do not accurately reflect the principles of tax depreciation. It's a common misconception that depreciation applies only to declining assets or specific property types, while in reality, it is a tax strategy available for various investments. Understanding this helps demystify how investors can leverage tax benefits effectively, even if the asset's market value is appreciating.