Why depreciation is the cost you never see on a receipt
Depreciation is the difference between what you paid for a vehicle and what you get back when you sell it, spread over the time you owned it. Nobody invoices you for it, so it is easy to leave out of a budget entirely — and on a newer vehicle it is normally the largest of the five ownership costs, ahead of fuel, insurance, maintenance and finance charges. A vehicle that loses $23,300 over five years at 12,000 miles a year is costing you 38.8 cents a mile before you have bought a single gallon of fuel.
Two mathematical shapes describe it, and they answer different questions. Declining balance takes a fixed percentage of whatever value remains each year. It produces a curve that falls steeply at first and flattens out, which is how used-vehicle markets actually behave: the dollar loss in year one is far larger than the dollar loss in year eight, even though the percentage is similar. Straight line removes an equal dollar amount each year until the vehicle reaches a stated residual. It does not describe a market, but it is exactly how lease residuals and business depreciation schedules are written, so it is the right model when you are matching a contract rather than predicting a sale price.
The rates themselves are the part you have to source. This calculator does not assume a rate for you, because depreciation varies enormously by model, body style, powertrain and market conditions. Get the number from a residual-value guide for your specific vehicle, or derive it from real listings: if a three-year-old example of your model sells for 60% of its original price, the implied constant annual rate is 1 − 0.60^(1/3) = 15.7%.
Two decisions hinge on the result. First, whether to buy new or used — the steepest part of the curve is spent by the first owner, so a two-year-old vehicle escapes it. Second, when to sell — because the annual dollar loss shrinks along the curve, the cheapest year to own a vehicle is almost always a later one.
The two formulas, and why they disagree
Declining balance is a geometric sequence. Each year you keep the fraction (1 − d) of what you had:
V_n = P × (1 − d₁) × (1 − d)^(n−1)
The first year gets its own rate because a new vehicle crosses from new to used the moment it is registered, and that transition is a one-off. After that a single rate compounds. The important property is that the value never reaches zero — it approaches it asymptotically — which matches reality, since a running vehicle always has some value.
Straight line is arithmetic instead of geometric:
V_n = P − n × (P − S) ÷ L
where S is the residual at the end of a useful life L. The dollar charge is identical every year. Because this line will cross the residual and keep going if you hold the vehicle past its stated life, the calculator floors the value at S.
The two disagree most sharply in the first two years and again at the far end. Straight line understates early loss and overstates late value; declining balance does the reverse against a lease contract. Use declining balance when you are asking what the vehicle will sell for, and straight line when you are matching a schedule someone else wrote.
Both feed the same per-mile figure:
$/mile = (P − V_n) ÷ (n × annual miles)
which is the number that lets you compare depreciation with fuel on equal terms and against a rideshare cost comparison.
Worked example: $40,000 over five years at 20% then 15%
You buy a $40,000 vehicle, expect it to lose 20% in the first year and 15% of its remaining value in each year after, and plan to keep it five years while driving 12,000 miles a year.
- Year 1. 40,000 × (1 − 0.20) = $32,000. Loss this year: $8,000.
- Year 2. 32,000 × 0.85 = $27,200. Loss: $4,800.
- Year 3. 27,200 × 0.85 = $23,120. Loss: $4,080.
- Year 4. 23,120 × 0.85 = $19,652. Loss: $3,468.
- Year 5. 19,652 × 0.85 = $16,704.20. Loss: $2,947.80.
Totalling up: you lost 40,000 − 16,704.20 = $23,295.80, which is 58.24% of the purchase price, leaving 41.76% retained. That averages $4,659.16 a year, and across 5 × 12,000 = 60,000 miles it is 38.83 cents per mile.
The averages hide the shape, and the shape is the useful part. Year one cost $8,000 and year five cost $2,947.80 — the same 15% rate applied to a smaller base. If you had bought the same vehicle at two years old for $27,200 and kept it three years to the same point, you would have lost 27,200 − 16,704.20 = $10,495.80 instead of $23,295.80, for the identical vehicle at the identical end state.
Compare the straight-line treatment of the same vehicle: $40,000 down to a $6,000 residual over 10 years is $3,400 every year, so after five years the schedule says $23,000 — nearly $6,300 above the declining-balance projection. That gap is why a lease that ends early can leave you owing more than the vehicle is worth.
How to read the result
Compare depreciation per mile against your fuel cost per mile. Both are in cents per mile, so the comparison is direct, and on a newer vehicle depreciation usually wins by a wide margin. Put numbers on it with the worked example below: depreciation runs 38.83 cents a mile, while improving fuel economy from 20 to 25 mpg at $4 a gallon saves 20.0 − 16.0 = 4.0 cents a mile. Buying the same vehicle two years old instead cuts the depreciation figure to 10,495.80 ÷ 36,000 = 29.2 cents a mile, a saving more than twice as large as the fuel-economy gain.
Read the year-by-year table, not just the total. The cheapest year to own the vehicle is the one with the smallest dollar loss, and you read it straight off the Lost in year column. Whenever the first-year rate you enter is at least as large as the later-year rate — the normal shape for a used-vehicle curve — that column falls monotonically and the cheapest year is the last one shown. Enter a first-year rate smaller than the later-year rate and the order can reverse, which is why the calculator flags that combination. This is the arithmetic behind the advice to buy a few years old and hold: you skip the steepest years and stop before the curve has flattened into irrelevance.
Treat percentage retained as the comparable figure across vehicles. Dollar losses are not comparable between a $25,000 car and a $75,000 truck, but percentage retained is. It is also the figure residual guides publish, so it is the one you can check your assumptions against.
Sanity-check your rate against a real listing. Find your model at the age you are projecting and back the rate out: if an n-year-old example sells for a fraction f of its original price, the implied constant rate is 1 − f^(1/n). Doing this once, with real prices, is worth more than any default rate.
Do not use this schedule for a tax return. Business vehicle depreciation in the United States follows MACRS with specific recovery periods, conventions and passenger-automobile limits set out in IRS Publications 946 and 463. Those rules produce different numbers from a market-value curve, and only the IRS schedule is acceptable to the IRS.
Percentage of purchase price retained, by rate pair
| Year | 15% then 12% | 20% then 15% | 25% then 18% | 30% then 20% |
|---|---|---|---|---|
| 1 | 85.00 | 80.00 | 75.00 | 70.00 |
| 2 | 74.80 | 68.00 | 61.50 | 56.00 |
| 3 | 65.82 | 57.80 | 50.43 | 44.80 |
| 4 | 57.93 | 49.13 | 41.35 | 35.84 |
| 5 | 50.97 | 41.76 | 33.91 | 28.67 |
| 6 | 44.86 | 35.50 | 27.81 | 22.94 |
| 7 | 39.47 | 30.17 | 22.80 | 18.35 |
These are illustrative rate pairs, not observed market data. Substitute rates taken from a residual guide or from real listings for your model before relying on a projection.
What this calculator does not account for
- Mileage above or below average. The curve here is driven by age alone. Trade-in appraisals penalise high mileage separately, so a vehicle at 25,000 miles a year will fall faster than any age-based curve predicts.
- Condition, accident history and service records. A reported accident can cost more value than a year of age, and none of it appears in the arithmetic.
- Market shocks. Fuel price swings, supply disruptions and model redesigns move whole segments at once. A rate calibrated in one market is not valid in another.
- Options and colour. Some options are recovered on resale and some are not. The purchase price you enter includes all of them; the resale value may not.
- Taxes, fees and finance charges. The purchase price field should be the vehicle price. Sales tax and registration are real costs but are not recovered on resale in the way the vehicle itself is.
- The tax treatment of a business vehicle. MACRS recovery is a separate calculation with its own conventions and limits; see IRS Publication 946.
- Modifications. Aftermarket parts rarely return their cost, so a modified vehicle usually retains a smaller share of its total spend than this projection suggests.
Depreciation among the other costs of ownership
Total cost of ownership has five components: depreciation, fuel or electricity, insurance, maintenance and repair, and finance charges. This calculator handles the first, which AAA's annual Your Driving Costs study reports as the largest single component of new-vehicle ownership cost. Once you have the per-mile figure, the others can be added to it on the same basis to get a single cost per mile that makes any two options comparable.
That per-mile number is the right input for several other decisions. Comparing driving against a car service or public transport uses it directly — see the rideshare versus driving cost calculator and the transit pass versus driving calculator, both of which need a per-mile cost that includes depreciation to be honest. Splitting costs with passengers on a shared commute uses it too, through the carpool cost split calculator.
On the vehicle side, choices that change value are worth checking against the curve before you make them. Fitting larger tires and regearing, for instance, costs real money that is unlikely to come back on resale — the axle gear ratio calculator and the tire diameter calculator tell you what those changes do mechanically, but this page tells you what the vehicle is worth while you are doing them.
A last word on method. Declining balance with two rates is a two-parameter fit to a curve that real markets follow only approximately. It captures the essential shape — steep then flattening — and that is enough for a buying decision. It is not a valuation. When money genuinely turns on the number, get an actual appraisal or price real listings of the same model, year and mileage.
Key terms
- Declining balance
- A depreciation method that applies a fixed percentage to the remaining value each period, so the dollar charge falls every year and the value approaches but never reaches zero.
- Residual value
- The value a vehicle is assumed to have at the end of a defined term. In a lease it is set at signing and determines the monthly payment; on a straight-line schedule it is where the line stops.
- Value retained
- Current value as a percentage of purchase price. The standard basis for comparing depreciation across vehicles of different prices.
- MACRS
- The Modified Accelerated Cost Recovery System, the depreciation method required for most business property in the United States. It is a tax calculation, not a market-value estimate.
- Total cost of ownership
- Depreciation plus fuel or electricity, insurance, maintenance, repairs and finance charges, usually expressed per mile or per year.