Depreciation is the rate at which an asset loses value over time. Depreciation standards are set by the IRS and range from simple to complex methods. Straight-line depreciation is the method most commonly used because it is simple to calculate.
IRS Depreciation
The IRS lists the useful life of vehicles at five years. The price of the vehicle divided by 5 will generate the annual depreciation rate. According to "The Wall Street Journal," the average cost of a motorcycle in 2007 was $12,304. Based on this figure, the average depreciation expense for motorcycles in 2007 was $2,460.80.
Significance
Depreciation represents the amount of value lost each year on an asset. As vehicles age, the value decreases. Depreciation rates matter most when an owner is pricing his motorcycle for resale. The actual value of the motorcycle may vary from the IRS rules when other items are taken into consideration, such as mileage.
Rule of 78 vs. Simple Interest
When financing a motorcycle, it is important to ask if it is financed using Rule of 78 interest or simple interest. Rule of 78 interest collects more interest in the first 24 months, which means that there is less principal being paid. Selling a motorcycle that still has a financed balance under Rule of 78 will mean the seller is upside down on the loan.
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