Owners Tips

What is Vehicle Depreciation and How Do I Calculate It?

Unlike real estate and fine art, vehicles are known as “depreciating assets.” In other words, rather than increasing in value over time, most vehicles lose their value over time and with use.

It has often been said that the value of a vehicle drops the moment you drive it off the dealership’s lot, which illustrates just how quickly depreciation kicks in. Moreover, we often think that fuel or insurance costs are our largest expenses as car owners, but accountants will tell you that depreciation is your biggest expense.

Depreciation Defined

Vehicle depreciation is defined as the rate at which a vehicle loses its value over time. Generally, most vehicles lose about 20% of their value after the first year, and roughly 10% to 15% every year thereafter. Typically, after five years, most vehicles are worth about half of what they were sold for when new.

However, the exact dollar values will vary depending on the make and model, the condition of the vehicle, how much it was driven annually, how well it was maintained, and whether it was ever in a collision. Even the colour of the vehicle will affect how quickly it loses its value. Odd paint colours or custom paint jobs, typically drive down the value of a vehicle over time.

Supply and demand also play a role in depreciation. During the pandemic, for example, when supply was very limited, depreciation calculations went out the window as many used vehicles held on to their value because of the global shortage of both new and used vehicles.

Calculating Depreciation

According to the Canada Revenue Agency, passenger vehicles depreciate at a rate of 30% per year, but that’s purely for tax purposes. To get a rough idea of what your vehicle may be worth, most industry experts calculate a 20% depreciation for the first year, and between 10% to 15% for each year thereafter.

Keep in mind, however, that it’s difficult to determine the value of a vehicle with simple math. As mentioned above, many other factors will determine how quickly a vehicle depreciates over time.

For a more accurate dollar value, check out AutoTrader’s What’s My Car Worth? page. The online calculator considers numerous factors to give you a more accurate idea of what your car is worth, after depreciation.

In addition to the basics, including make, model year, trim, and kilometres, the online tool takes into account the condition of your vehicle, and whether it’s been in an accident. You’ll then get a value range that takes into account whether you’re selling privately or trading it in with a dealership.

Depreciation is a fact of life. Unless you buy a rare vehicle that’s sure to be in high demand for years to come, expect your car, truck or SUV to diminish in value the moment you call it your own.