What is the deduction that allows an investor to write off the cost of their investment in income-producing property?

The correct answer is tax depreciation, which allows an investor to deduct the cost of their investment in income-producing property over a specific period, typically 27.5 years for residential property and 39 years for commercial property. This deduction reflects the wear and tear, deterioration, or obsolescence of the property over time and is a significant benefit for real estate investors. By utilizing tax depreciation, investors can reduce their taxable income, ultimately leading to lower taxes owed.

In contrast, tax exemptions involve specific instances where certain incomes or properties are not subject to taxation, which does not apply directly to investment properties. Property appreciation refers to the increase in the value of a property over time and is not a deductible expense; rather, it is a benefit realized when the property is sold. Capital gains represent the profit made from selling an asset for more than its purchase price and are subject to taxation; they are not a deduction. Understanding tax depreciation is crucial for real estate investors, as it can significantly impact their investment strategy and tax liability.