Estimating Asset Values and Asset Depreciation
In response to my latest balance sheet, Wacko asked a question:
Any pointers on how to calculate an automobile’s depreciation? Obviously I can look at Kelley Blue Book, but I do not know the monthly depreciation.
Also, I was wondering if anyone knew of an accurate way to determine the value of one’s home. I want to be able to balance the current value of my home with the loan on it.
What is the true value of an asset?
It’s probably not the amount you paid, first of all. The best way to value an asset is to determine how much money an individual will provide to transfer ownership. Take a car, for example; as soon as you drive a new car off the lot, it no longer has the cachet of being a “new car.” Thus, it would be difficult to find a buyer to pay as much as your paid.
For my car, I use Edmunds.com to determine the fair market private party selling price. Kelley Blue Book is a good resource, as well. By updating the value each month, you can start to get a picture of the monthly depreciation rate. This is just an estimation as the value may fluctuate month to month based on other market conditions. I smooth out these fluctuations by taking the difference between the Edmunds value at the end of the year and the value at the end of the prior year and dividing by 12 to revise my monthly depreciation rate. Surprisingly, my car hasn’t lost much of its resale value over the past year.
This is not the same as determining “official” depreciation to be used in reporting to the IRS. Depreciation for tax purposes has less to do with sell value than with determining a standardized way for businesses to deduct depreciation.
There are some tools that help you determine the value of your house. Many people simply use the value determined during their latest tax assessment. You can also estimate based on the selling prices of similar homes in your area, which are publicly recorded. You can also try Zillow, but there is a lot of dispute regarding the accuracy of their numbers.
You never really know what someone will pay for your asset until it is sold, so when you value your car or house, you’re looking at estimations. As long as the idea is to track your own progress, not compare your asset values to others’, just use the same method of estimation each time. You’ll get a good picture of the trend over time, even if the value isn’t exact.