Learn How Much A New Car Depreciates & How to Calculate Depreciation
If you’re in the market for a brand new car (maybe you’re using that tax refund to take care of the down payment, or maybe it’s just time for a new vehicle), consider the sticker price before making your final decision. Car depreciation, or the loss of value on your vehicle over time, will affect the overall financial impact of your buying decision.
This is because car depreciation chips away at the value of your car, starting from the moment you drive it off the lot. According to industry data, a new car will lose over 10% of its value in the first month after purchase alone — and that number just continues to fall as long as you own the car.
Current car depreciation rates show that the value of a new car or truck purchased in 2019 can drop by over 20% over the course of the first 12 months you own the vehicle. Over the four years following, the value will decrease at a rate of approximately 10% annually (our car depreciation formula will break this down in more detail).
By this math, a five year-old car would be worth as little as 40% of its original value, a substantial hit. That said, there are several specific factors that affect or modify vehicle depreciation rates. Here, we’ll discuss these factors in detail and outline a formula that works as a car depreciation calculator to help you maximize your deduction while keeping depreciation in check.
The Origins of Car Depreciation
The concept of car depreciation as we know it has been around since the 19th century, when it rose to popularity among the major railroad companies of the era because it allowed them to show increased profits. In order to flesh out the concept, we need a brief history lesson:
Business leaders of the time discovered that, through a bit of accounting wizardry, they could allow the cost of things like building rail cars or laying track to be subtracted from their annual income over time (as opposed to all at once).
To do this, the companies calculated how much of a product — in this instance, a train — was “used up” at the end of each year and had, therefore, lost its value. This was accomplished by assigning a value to that use (yielding a lower amount), and then using that lower amount to count against their annual income. Each year, the amount remaining would decrease until the value was down to zero.
Vehicle depreciation works in exactly the same way. In essence, car depreciation is a numerical representation of the portion of the total value of your vehicle you’ve used. For tax purposes, this is calculated once a year.
Car Depreciation Today
As industries modernized and technology advanced far beyond the original railroads that originated the depreciation system, they took the depreciation system with them. Modern businesses found themselves concerned with assets that didn’t “wear out” in the traditional sense, but did lose their value as new, more innovative products entered the market.
To account for these products (like a computer, a phone, or — for our purposes — a car), businesses use depreciation to assign a quantitative value relative to the product’s original price.
What Factors Affect Vehicle Depreciation?
Unfortunately, if you want to drive a brand new car, you’ll usually need to pay more than the car is actually worth in the first place. This is because you’re not only covering the cost of the vehicle, but the associated taxes and fees (as well as the operating costs of the dealership).
This also applies for traditional used cars purchased in a retail setting, as well as certified pre-owned vehicles. The short of all this is not great: when you consider the actual cost of the car relative to its value, you can expect to take a loss before you even leave the dealership.
That said, there are additional factors to weigh. Luxury cars, or vehicles from an esteemed brand, tend to retain more of their value over time by virtue of perception. Perception can influence car depreciation in other ways as well.
For instance, the demand for trucks or SUVs relative to smaller, more fuel-efficient cars will affect the retained values of each vehicle type over time. When large vehicles are in higher demand, they’ll retain their value better than cars, and vice versa.
We should also note that the IRS does set a maximum deductible amount based on depreciation. For 2018, the maximum write-off for depreciation of a new or used vehicle in the first year of ownership is $10,000, with an additional $8,000 available in bonus depreciation.
Keep in mind that these figures assume 100% business use, so your actual deduction amount is likely to be lower.
How Can I Reduce Car Depreciation?
While even the most judicious maintenance won’t save your car from losing its value over the time you own it, there are a few basic guidelines to follow that will help your car retain as much of its original value as possible.
First, using your vehicle less can help slow car depreciation — after all, vehicle depreciation is the price of using your car or truck, so it makes sense that reducing use could reduce the rate of loss of value. As a general rule, 10,000 miles or less per year will prevent excessive wear and tear from degrading the value of your car.
Secondly, and perhaps most critically, is taking care of your vehicle with routine maintenance. Change the oil and filter on time, keep fluids replenished, and replace worn-out parts with new ones to prevent damage to other systems.
It’s also a good idea to keep technological advancements in mind, especially where safety features are concerned. If you choose to buy a brand new car, choose one that has top-of-the-line safety features — it’ll retain its value better over your first five years of ownership, when depreciation really counts.
Is There an Auto Depreciation Calculator or Car Depreciation Formula for Me?
There are a number of vehicle and car value depreciation calculators or car depreciation charts available online that can give you a rough idea of how much value your vehicle has lost over the time you’ve owned it. These tools will give you a general picture of what your car or truck is worth today.
That said, there are better options available than a depreciation calculator for your car. Starting with general information like the make, model, year, and features of the vehicle, you can then factor in any additional information that could affect its value, like accident history, flood damage, or number of owners to get a holistic picture of your vehicle depreciation for the IRS.
Can I Write Off Car Insurance Costs?
If you use your car for work, part of your insurance costs may be deductible on your tax return. To calculate the portion of insurance costs that are deductible by IRS standards, you’ll need to track your mileage — this will allow you to figure out the percentage of insurance costs that go to the business use of your vehicle and, therefore, the amount of those costs you are able to deduct.
Additionally, you may be eligible to deduct other automotive expenses like fuel costs, repair and maintenance charges, parking fees, and — yes — value depreciation. If you can prove that these costs are directly related to the business use of your vehicle, they’re deductible!
There is a small catch: in order to deduct the cost of your automotive expenses related to business, they must exceed 2% of your AGI (adjusted gross income). For example, if you make $50,000 annually, your auto expenses must total $1,000 or more in order to qualify for deduction.
What About Vehicle Taxes and Fees?
Vehicle registration fees and taxes are also deductible along the same guidelines as other car-related expenses, meaning you are able to deduct the portion of these expenses that reflects the business use of your vehicle.
These expenses are deductible whether you use the actual expense method of calculation or opt for the standard mileage deduction instead. You’ll want to consider your individual circumstances when choosing your calculation method.
In many instances, the standard mileage rate will yield a more substantial deduction, but if you’re looking at taking a substantial vehicle depreciation deduction (like you would within the first five years of purchasing the car), the actual expense method may be more beneficial for you.
Car Depreciation Takeaway
By accounting for each of the factors that contribute to car depreciation, you’ll be able to figure out the exact value of your car for tax purposes and maximize your write-offs. Tracking things like mileage, maintenance costs, and other automotive expenses automatically can take the guesswork out of calculating car value depreciation at tax time.