The old adage about how your brand new car instantly plunges in value as soon as you drive off the lot? There is some truth to it. Cars tend to depreciate quickly, while other items hang onto their value longer. So which items will you be able to sell later for a decent price, and which ones are doomed to be worth a lot less than you paid? Here are some examples on both end of the depreciation spectrum.
- The old adage that a new car loses more than 1/10th of its value as soon as you drive it off the lot defines the concept of depreciation.
- Not only cars, but also also consumer electronics, toys and games, and other consumer products are subject to rapid depreciation in the second-hand market.
- Homes may rise in value over time, but for tax purposes you can often depreciate the value of the purchase price over 27.5 years.
The depreciation rate varies by model, but on average a new car loses 11% of its value the moment you leave the lot, according to Edmunds.com. After five years, that car is worth just 37% of what you paid for it at the dealer. The silver lining: by buying a car that is even just a year or two old, you can get a great deal - after the initial owner has already taken that loss. (For more, see: The True Cost of Owning A Car)
Computers and Electronics
Few things seem to become outdated as fast as electronics. Robert Wesley of NextWorth, an electronics trade-in and resale company, says that while electronics overall can depreciate quickly, Apple products tend to retain their value best, due to the brand's extra perceived value with consumers. He adds that consumers can slow the depreciation rate of electronics by keeping the item in a case, using a screen protector and saving all original manuals and packaging.
The average price of a timeshare on the primary market is around $20,000 and could be more depending on location and specifications. An identical timeshare in the resale market, on the other hand, can be found for $4,000 or less. Why? Unlike other real estate, timeshares should never be viewed as an investment, says Lisa Ann Schreier, founder of the consulting company Timeshare Insights. Instead, their value is in the savings you will realize by not needing hotel rooms during future vacations.
When it comes to toys, the value over time can vary greatly. Your average toy store purchase loses most of its value as soon as you take it home, so generally toys depreciate quickly. The exception is when there is a collectability factor. Elizabeth Stewart, an appraiser from Santa Barbara, California, advises against fad items that are mass produced (think Beanie Babies). On the other hand, toys from the pre-'70s - as long as they are like new or, better yet, still in the box - have zoomed in value because of their rarity.
Hunting and Sporting Equipment
Les Miles, an appraiser from Texas who serves on the American Society of Appraisers' machinery and technical specialties committee, says the best items for small depreciation - and sometimes even appreciation - are things everyone wants to use, and items that do not experience a lot of physical deterioration. He says rifles, shotguns and other sporting paraphernalia would fall into this category.
Without a doubt, homes and other real estate tend to appreciate over time. But, for tax purposes, you can depreciate your home's value in certain cases. The IRS considers residential property to have a 27.5 year lifespan, and the property depreciates continuously over this period (although this write-off only applies to rental or business property).
In real life, property value depends on a host of factors, including condition, location, the relative value of nearby homes, desirability of the neighborhood, etc. Of course, the economy also affects market values - as many homeowners have discovered recently. Even if a home appreciates in value, when it is sold to a new homeowner, the 27.5 years tax depreciation clock begins anew.
The Bottom Line
For some items, the market value takes a nosedive once the item is no longer new. If you are thinking about buying something you might want to sell at some point, make sure you research the depreciation rate and be realistic about resale values. (For additional reading, also take a look at 3 Investments On The Rise In 2011.)