New cars lose a significant amount of value after purchase, which means you won’t be able to sell your car for the same amount you paid for it, even if you just drove it off the lot today. Even used cars lose value over time just by getting older. That drop in value is called depreciation.
All cars depreciate in value over time, but how much value a vehicle loses over the years varies based on a number of factors, like total mileage, the amount of wear and tear the car has, and its make and model.
What is car depreciation?
Car depreciation describes how your car loses value after you buy it. Almost every car loses value over time, but buying a new car means your car will likely lose value the moment you drive it off the lot, just because it’s no longer brand new anymore.
A number of factors impact how much (and how quickly) your car depreciates over time, including:
Your car’s make and model (some types of cars lost value faster than others)
Total mileage (more miles usually means it’s worth less)
Wear and tear (dings, scratches, and dents all affect value)
Whether or not you keep up with regular maintenance
The overall condition of your car
How do you calculate depreciation on a car?
In most instances, new cars lose about 20% of value in the first year of ownership and then lose another 10% to 15% per year until they are more than five years old, according to Kelley Blue Book, a third-party automotive research company. [1]
That means that if you paid $27,000 for a brand new car in 2022, your vehicle will likely depreciate by about $5,400 in 2023 and $2,700 in 2024.
Because depreciation rates vary from one vehicle to the next, the best way to get an accurate idea of how much your car is worth is to get an online quote from a third party like Kelley Blue Book, Consumer Reports, or another trustworthy source.
Car depreciation calculator
Lots of factors go into determining depreciation rates for your vehicle, but drivers can get a general idea of their car’s total depreciation using these standard formulas:
Purchase price x .2 = Amount your vehicle has depreciated in the first year
Purchase price x .1 = Amount your vehicle has depreciated each additional year
Once you have both of those numbers, add them together and subtract them from your original purchase price. For example, if you bought a $50,000 car three years ago, this is how you would determine the average depreciation value:
Step 1: $50,000 x .2 = $10,000
Step 2: $50,000 x .1 = $5,000
Step 3: $10,000 + ($5,000 x 2) = $20,000
Step 4: $50,000 - $20,000 = $30,000
This formula shows us that a $50,000 car purchased three years ago would be worth about $30,000 today. But keep in mind that these numbers are just an average, and some cars maintain a much higher value over time while others lose value more quickly.
Why do vehicles lose value?
The most common reason cars lose value over time is because of wear and tear, accidents, and other damage. The common dings and scrapes that happen over time can lower the value of your car, and any larger issues, like damage caused by accidents or inclement weather, will significantly impact your car’s value.
But even without a single scratch, a new car loses value the moment you drive it off the lot. This is partly because a car is officially “used” once you take ownership, even if you have only owned it for a few minutes. It is also because a brand new car is sold at retail prices while a used car is sold at market value, so once a car has an owner the value drops considerably.
Car depreciation chart
The chart below shows the top ten vehicles with the highest five-year resale value, meaning the cars that will depreciate the least. For example, Kelley Blue Book predicts that the 2023 Toyota Tundra will be worth 73.30% of its original value five years after purchase.
What can you do to keep your car from depreciating?
Keep mileage low: Higher mileage vehicles tend to depreciate faster than vehicles that spend less time on the road.
Keep up with regular maintenance: Staying on top of oil changes, tire rotation, and other regular maintenance is a good way to keep your car in good condition, which can help reduce your car’s rate of depreciation.
Avoid customizations: While custom rims and aftermarket LED headlights may help you personalize your car, it could limit the number of people who will want to buy it in the future. Stick to manufacturer parts to avoid excess depreciation.
Avoid the dealership: When you sell a car to a dealership, you are trading convenience (and a guaranteed sale) for a lower price. Doing a little extra work and selling your car on your own can get you a higher price.
Write it off: If you use your car for work, you could potentially write off at least some of the cost of your vehicle’s depreciation, which won’t help your car depreciate slower but will at least save you a little money.
Buy used: If you buy a car that is more than five years old you’ll pay a much lower price (because of depreciation) and you’ll avoid the years with the biggest hit to the car’s value.
Gap coverage and car deprecation
The fast depreciation of a new car in the first few years of ownership is one reason why drivers who have a loan or lease on their vehicle should purchase gap coverage. Gap coverage pays the difference between the actual cash value (ACV) of your vehicle and what you owe on your loan.
If you are in an accident that totals your car in the first few years after purchase, your car insurance will write you a check for your car’s ACV. That settlement will be for what the car insurance company decides your car is worth based on depreciation, so it might not be enough to pay off the rest of your loan or lease.
If you owe more on your loan than your car is worth, without gap insurance, you could be stuck making monthly payments for a car you can’t drive. Gap coverage pays out the rest of the money you owe so you can start a new lease or buy a new car without having to make payments on the old, totaled one.
How does car depreciation work on taxes?
Generally speaking, the government allows drivers to use a standard mileage rate to deduct business use of their vehicle, or drivers can use the Modified Accelerated Cost Recovery System (MACRS) to depreciate cars made after 1986. There are some key differences between these two types of deduction, including:
MACRS: Allows drivers to deduct a large amount up front and take smaller deductions (or no deductions, depending on the situation) later on.
Standard mileage rate: Allows drivers who own or lease their vehicle to deduct a certain amount per mile driven each year for business purposes. A standard mileage rate spreads your total deduction over the lifetime of your car. The standard mileage rate for 2023 is 65.5 cents per mile for all miles of business use.
Keep in mind that the U.S. tax system is incredibly complex, so which type of deduction is appropriate for your situation can vary based on a number of factors. Check with your accountant to find out the best way to deduct the depreciated value of your vehicle.
Can you deduct mileage and depreciation?
Yes, drivers who use their car for business purposes can deduct mileage or depreciation on their taxes. According to the IRS, drivers who only use their car for business purposes can deduct the entire cost of the vehicle on their taxes. [2] But drivers who use their car for both business and pleasure can only deduct business-related costs.
Frequently asked questions
How much does a car depreciate per year?
According to Kelley Blue Book, new cars lose about 20% of their value in the first year and about 60% of their value in the first five years.
Do you have to pay back depreciation on a car?
Maybe, depending on the situation. For example, drivers who write off their car’s depreciation on their taxes with a Section 179 deduction will be expected to pay back depreciation costs when they sell their car in the future.
How does car depreciation work for Uber, Lyft, and other rideshare drivers?
According to Intuit, rideshare drivers can deduct the actual expenses of driving for a living, including gas, oil, repairs, insurance, maintenance and depreciation or lease payments, but it's important to work with an accountant to make sure you’re filing your taxes correctly.
