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What is Appreciation?
Mary McMahon
Mary McMahon
In the financial world, appreciation is a term used to describe the increase in value of an asset which occurs over time. Understanding appreciation can be important for accounting, as it can influence the numbers on a company's balance sheet in addition to playing a role in calculation of taxes. The opposite of appreciation is depreciation, in which the value of an asset declines over time; depreciation is also an important concept in accounting.
A wide variety of assets can appreciate. As a general rule, anything used as an investment is capable of appreciation, along with depreciation. This includes real estate, art, stocks, bonds, and similar assets. When an asset appreciates, someone can opt to sell it for a higher price than was paid, making a profit on the increase in value.
The reasons why assets rise and fall in value are quite variable. As a general rule, decreased supply and increased demand drive prices up. For example, someone who buys real estate in an area which is rapidly expanding can often count on appreciation, as more and more people want to settle there, and are willing to pay higher prices for the privilege. Things like works of art appreciate as evaluations of their intrinsic value change; other works by the same artist may sell for high amounts, driving the value of a work up, and the death of an artist also tends to create a rise in value for his or her work, as people understand that the supply is limited.
Things like stocks and bonds appreciate as company performance improves. Improvements in performance also tend to drive up demand for stocks, at the same time that the supply diminishes because people decide to hang on to their stocks since the company is doing well. Market fluctuations can also influence the appreciation or depreciation rate of assets like foreign currency and securities.
Depreciation is commonly seen with equipment. Things like vehicles, computers, and heavy machinery are viewed as assets, because a company or person had to buy them and they are worth money, but their value declines over time and with use. Depreciation of equipment can be treated as a writeoff in certain tax situations, with the loss of value of the asset being recognized as a business cost. Conversely, of course, people can be taxed when their assets appreciate, as for example when a property is re-evaluated by a tax assessor and taxes go up to reflect the increase in its value.
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
Learn more...
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
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Discussion Comments
@allenJo - Yes, but at least you can deduct your property taxes. So you'll get some money coming back to you as a result.
I haven’t owned too many appreciating assets besides my own home. I do run a small business on the side and I choose to claim depreciation of some of the equipment like computers and stuff like that.
It helps a little, because I’m mainly in a service business where I don’t have a lot of other major expenses to deduct.
@nony - I like the fact that my house value appreciates; but I take a hit with rising property taxes, as the article points out.
That’s always been kind of depressing. I mean, even if I paid off my mortgage completely I’d still have to pay the property taxes. For that reason alone, I never plan to stay in a house forever. Seriously, at the end of 30 years, the taxes would be more than the original mortgage was.
@MrMoody - That is weird. Generally anything that gets used and worn out like that should depreciate, but I understand that the local economy would have a part to play in that.
The only two appreciating assets that I’ve ever invested in were stocks and real estate. I’ve had better luck with real estate than I ever did with stocks.
I lived in a part of the country that had fairly stable real estate markets, unaffected by boom and bust cycles of the economy. Stocks, of course, are very affected by those cycles, and I’ve had more than my share of depreciation in that regard.
Perhaps I should have put some money in gold, too. That’s appreciated steadily for quite some time, despite a few pullbacks in prices.
Sometimes the things you don’t normally think would appreciate eventually do, in some circumstances.
For example, I lived in Asia for several years and in my second year I bought a used car. Believe it or not, the cars actually appreciated there. So I could buy a used car for $10,000 and sell it a few years later for $12,000.
The reason I could do this is that the price of the new cars on the market always steadily increased. This put upward pricing pressures on the used cars, which were always more and more in demand because of their affordability.
So theoretically, you could make money on your car purchase. I never did that, but I always thought the whole thing was kind of weird. Of course, in the United States, it’s a different story; cars always depreciate, period.
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