This calculator applies a single constant percentage to whatever you own, shrinking the balance each year the way a bank shrinks an amortising loan in reverse. It answers one narrow question well: if the item loses a fixed share of its remaining worth every twelve months, what is it worth after a given number of years, and how much of the purchase price has actually gone.
Why the loss shrinks even as the rate stays flat
Because the percentage applies to whatever value is left, not to the original price, the dollar loss is largest in year one and gets smaller every year after that, even though the rate never changes. A 28,000 purchase depreciating at 18% a year loses about 5,040 in year one but only around 1,880 in year five, because by then there is less value left to take 18% of.
This is the same declining-balance shape used for machinery, computers and other business equipment, which is why the tool works for far more than cars: a laptop, a forklift or a boat all follow the identical curve once you know the annual rate.
A useful shortcut is the value's half-life: the number of years it takes to lose 50% regardless of the starting price. At 18% a year that is about 3.5 years; at 15% it stretches to about 4.3 years; at 12% it takes roughly 5.4 years. Knowing the half-life lets you sanity-check a quoted resale value without re-running the formula.
Two rates, one asset: a worked comparison
Take a 28,000 purchase and run it at two different annual rates over five years. At 18% a year it is worth about 10,381 after five years, a loss of roughly 17,619. At 12% a year the same item is worth about 14,776, a loss of roughly 13,224.
The gap between those two outcomes is about 4,396 in retained value at year five, entirely from a six-point difference in the assumed annual rate. That is the single biggest source of error in any depreciation estimate: the rate itself is a guess dressed up as an input, and small changes to it compound over several years into a large swing in the answer.
Holding the rate fixed at 18% and changing only the horizon shows the same shrinking-loss pattern from another angle: after three years the 28,000 purchase is worth about 15,438, and by year eight it has fallen to about 5,724. Roughly two-thirds of the five extra years' worth of loss happens in the first three of them.
Where a constant rate stops matching reality
Real depreciation curves are rarely this smooth. Most vehicles and equipment lose a disproportionate chunk of value the moment they are first registered or taken out of the box, then settle into something closer to a steady annual rate — so a single percentage applied from year zero tends to understate the first year's drop and overstate later years' drops.
The formula also assumes average condition, average mileage or average use every year. A car driven twice the typical annual distance, a laptop kept in a stockroom, or a piece of equipment that skips a service interval will diverge from the curve in either direction, sometimes by a wide margin.
Market shocks break the formula entirely. A model recall, a fuel-price spike that hits large trucks and SUVs harder than small cars, or a supply shortage that briefly pushes used values above new-car prices are all events no constant rate can anticipate. Treat the output as a baseline to be adjusted against comparable listings, not a forecast.
Book depreciation versus tax depreciation
The number this calculator produces is an estimate of market value, sometimes called book value. It is not the same figure a business uses on a tax return, where depreciation follows a fixed statutory schedule rather than a market-based guess, and the two numbers can diverge sharply for the same asset in the same year.
In the United States, businesses generally depreciate vehicles under the Modified Accelerated Cost Recovery System, and the IRS caps the deduction allowed for passenger automobiles each year through published depreciation limits, so a genuinely expensive vehicle cannot be written off at the same pace this calculator implies.
In the United Kingdom, capital allowances on cars use writing-down allowances applied to a declining pool, currently 18% a year for most cars and 6% for higher-emission cars, which is structurally the same declining-balance method this tool uses, only the percentage is set by HMRC rather than chosen by you.
Frequently asked questions
- What depreciation rate should I use for a car?
- There is no single correct figure; it depends on the make, mileage and market. A commonly used planning range is 15-20% a year for the first several years of ownership, tapering slightly after that, but always check a handful of comparable used listings for the specific model before settling on a rate.
- Why does the value drop fastest in the first year?
- This calculator applies a flat annual rate, so in reality it understates a typical first-year drop, which for many new vehicles is steeper than later years because of the jump from new to used status. If you know the item's first-year loss separately, apply that first, then use this tool's rate for the years after.
- Is book value the same as resale value?
- No. Book value here is a mathematical projection from the purchase price and a chosen rate. Resale value is whatever a real buyer will pay today, which reflects condition, mileage, local demand and the current used market, and can sit well above or below the projection.
- How is depreciation different for tax purposes?
- Tax depreciation follows a fixed statutory method rather than an estimate of market value. US businesses use MACRS with annual caps on passenger vehicles set by the IRS, while UK businesses use capital allowance writing-down rates set by HMRC, and neither schedule is required to track what the asset would actually sell for.
- Does mileage or usage change the calculation?
- Not in this calculator, which only takes a purchase price, a rate and a number of years. Heavier-than-average use tends to push actual resale value below the projection, and lighter-than-average use tends to push it above, so treat mileage as a manual adjustment to the output rather than something the formula accounts for.
- Can this formula be used for something other than a car?
- Yes. The declining-balance method behind this calculator is the standard approach for any asset that loses a roughly constant share of its remaining value each year, including computers, machinery and boats — just substitute a rate that fits the asset class you are pricing.
Sources
- IRS Publication 946 — How To Depreciate Property — Describes MACRS depreciation and the separate annual depreciation limits that apply to passenger automobiles (current version covers tax year 2024 returns).
- HMRC — Capital allowances: business cars — Sets the 18% main-rate and 6% special-rate writing-down allowance percentages used for business cars (guidance current as of 2025).