Definition

Depreciation is the gradual decrease in the value of an asset over time due to wear and tear, obsolescence, or market conditions. It’s commonly used in accounting to allocate the cost of an asset across its useful life.

Analogy

Imagine buying a brand-new laptop for $2,000. The moment you start using it, its value drops. A year later, even if it works perfectly, you might only be able to sell it for $1,200. That $800 loss? That’s depreciation at work! Just like electronics, cars, furniture, and even buildings lose value over time.

Little-Known Fact

Did you know that in real estate, land doesn’t depreciate, but buildings do? That’s because land doesn’t wear out, while structures require maintenance and eventually age. Smart real estate investors use this to their advantage—by claiming depreciation (also called Capital Cost Allowance in Canada) on rental properties, they can reduce their taxable income and keep more money in their pockets!

Action Step

Own a business or rental property? Check if you're properly claiming depreciation deductions to lower your tax bill. If you're buying a car, consider used over new—someone else already took the biggest depreciation hit!