Do Used Cars Depreciate The Same as New Cars?

Accounting has fixed ways and percentages for different items, buildings, houses equipment, machinery, cars and others that are considered subject to depreciation.  For cars, normally accounting would have a four to five year standard rate of depreciation, where at the end the cars would only have scrap book value.  The four and five year rate of depreciation would be at twenty-five percent per annum and twenty percent per annum, respectively.  They may depreciate in the books of accounting but does not necessarily mean to be their true market, assessed or acceptable value.

For purposes of standard depreciation cars younger than five years would depreciate at the same rate as new cars until the end of their depreciable life.  Used car depreciation for those that are five years old or older, would have already fully depreciated in accounting books.  So, a less than five year old car would be the same as new car depreciation based on accounting methods while five year old or older cars no longer depreciate in accounting books.

A misconception of depreciation often happens for those who are not aware of the accounting method and often pertain to resale value of used and new cars.  A new car would still be considered new as long as it is relatively way below a year old but also considered as used.  The depreciation applied for the ‘new’ cars will be the annual rate divided by twelve months multiplied by the number of months used.  If the basis of a new car will be one still on display at dealer and not yet sold, then it does not depreciate until it is driven away by a buyer.

A question might also be raised on classic and restored cars that many of them would cost more than new cars.  The simplest explanation to this is just like antique items that are valued highly.  They no longer depreciate in accounting books but instead appreciate through years as long as they are kept and maintained in pristine condition.

When discussing between used car depreciation and new car depreciation in accounting, especially as a corporate asset and used as a deductible, both would be the same.  That’s the reason why almost all companies purchase brand new cars.  The companies benefit from depreciation as deductibles when paying taxes.  Individuals would likewise benefit in the same manner.  Fully depreciated used cars no longer have depreciable value and companies would only benefit in declaring repair and maintenance costs in their books for taxation purposes.

As a last point to mention, a used car may be fully depreciated but it may have a high resale value.  The high resale value of a car has nothing to do with its depreciation, ‘new’ or used.  This especially applies to high-end exotic or limited edition cars.