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The Divorce Encyclopedia
Depreciation


Term Definition Depreciation - in appraising, a loss in property value from any cause.
Application in Divorce In accounting, depreciation is an allowance made against the loss in value of an asset for a defined purpose and computed using a specified method.

Depreciation spreads the cost of an asset over its estimated useful life. For businesses, depreciation reduces taxable income of an enterprise but does not reduce its cash; thus businesses depreciate plant and equipment as fast as they can.

For business and tax purposes, there are nearly a dozen established ways to depreciate an asset.

Depreciation is one of the many factors that may enter into the calculation of any asset value.

The term depreciation is also used in conjunction with inflation because Inflation reduces the value of money. Thus money repaid tomorrow will not be worth what it was when it was borrowed yesterday. In martial settlements, the depreciation of money, which is a fact of life in the modern economy, is considered in such decisions as child and spousal support.

In a divorce, unpaid for cars are often marital property, and another d-word -- depreciation -- joins the d-word of distribution.

An extreme example of depreciation happens in the ownership of a private automobile. Under normal conditions, a private automobile continues a line of depreciation from the first time the owner-driver turns the ignition key. The first time the car is driven off the lot, and even before the first crushed fender, that shiny new car has depreciated. The amount and speed varies from model to model. Unlike business assets, however, the owner-driver simply absorbs the loss. A driver-owner who finances an automobile thus makes a capital expenditure in a continually depreciating asset that loses most of its value by the time it is paid for. Sometimes it gets worse. Some owners face a situation where the unpaid balance on their car loan is greater than the value of the car, and thus they have negative equity in an asset that continues to depreciate as they continue to pay for it.

Unlike business, where borrowing makes sense because it finances growth, financing an automobile is borrowing to buy an appliance that loses value! And never stops losing value until it hits a nominal book value, which really means little except that the car still runs.

And this ignores the cost of operation -- insurance, gasoline, oil, tires, registration, maintenance.

In their divorce, therefore, when Rufus offers Rhonda their shiny smart coupe (the same one they both knew they really could not afford), she should think long and hard because in a few years that snappy roadster will be on its way to the crusher and between now and then it will depreciated dramatically and drained her of a substantial amount of money on the way.

Smiling automobile salesman use all manner of made-up numbers and expressions (money "in the trunk") to obscure the real cost of automobile ownership, but just ask him the five-year depreciation of a car. Regardless of the sales pitch, an automobile is not an investment; it is an expense and a big one. The only way an automobile ever becomes an appreciating asset is in those very few cases where it becomes collectible.

When a car is used for business (and the I.R.S. guidelines do not include travel back and forth to the job), a private automobile may be depreciated as a business expense, but the allowance does not cover the above-the-highway expenses incurred by the owner-driver.

With reasonable care and maintenance, a family home does not depreciate in most cases.

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