Define depreciation in the context of real estate.

Depreciation in the context of real estate refers to the reduction in property value over time due to various factors such as wear and tear, obsolescence, and changes in market conditions. This decline in value can be attributed to physical deterioration of the property, economic influences affecting demand, or outdated features that do not meet current needs. Understanding depreciation is crucial for property owners, investors, and appraisers, as it plays a significant role in determining not only the current market value of a property but also the deductions available for taxation purposes. The correct answer reflects these key aspects of how depreciation functions in real estate.