What accounting principle allows an investor to write off the cost of investment in income-producing property?

The correct answer is tax depreciation, which refers to an accounting principle that allows an investor to allocate the cost of an income-producing property over its useful life. This allocation is crucial for tax purposes, as it reduces the taxable income that an investor must report. By writing off the cost through depreciation, investors can receive significant tax benefits, as this non-cash expense helps to lower the overall tax burden associated with rental income.

Tax depreciation applies specifically to tangible assets, such as buildings and improvements, which lose value over time due to wear and tear. The IRS has established specific guidelines outlining the depreciation methods and timelines for different types of properties, allowing investors to consistently apply these principles in their financial reporting.

For context, capital gains relate to the profit from the sale of an asset, and they do not allow for write-offs but rather apply when an investment is sold. Amortization involves the gradual writing off of intangible assets, which does not apply to physical income-producing property. Value appreciation, while important in understanding the overall market and potential future gain, does not provide a mechanism for immediate tax benefits like depreciation does.