What does the term “depreciation” mean in real estate appraisal?

The term “depreciation” in real estate appraisal refers to a decrease in property value caused by various factors. This can happen due to physical deterioration, which is wear and tear from normal usage; economic obsolescence, which refers to external factors that negatively impact property value, such as changes in the neighborhood or economy; and functional obsolescence, which relates to outdated design or poor layout that diminishes a property's usefulness. Understanding these aspects is crucial for appraisers when determining the current value of a property.

Each of the other choices presents concepts that do not align with the established definition of depreciation. For instance, an increase in property value due to market improvements does not describe depreciation but rather appreciation. Similarly, a temporary reduction in assessed value during market downturns doesn't specifically capture the essence of depreciation, which focuses on the decrease in value itself rather than fluctuating assessments. Lastly, a reduction in property taxes based on current market conditions pertains to taxation rather than the value of the property itself. By establishing that depreciation encompasses various forms of decline in property value, the definition provided in the correct answer is appropriately comprehensive and aligned with industry standards.