What Is Appreciation?
Appreciation is the increase in value of an asset which happens over time. Appreciation can play a role in the calculation of a company’s assets. It also plays a role in the calculation of taxes. The opposite of appreciation is depreciation. Depreciation is when the value of an asset decreases over time. Both Appreciation and Depreciation are a vital concept in accounting.
There are a lot of assets that can appreciate. Anything that is used as an investment can appreciate and depreciate. This may include real estate, stocks, art, bonds, and similar assets. To make profit from an asset that has appreciated, you may sell it to a much higher price than paid.
Real estate appreciation is an increase in the value of your home and property. When a property’s value increases you get a greater profit when you sell. Demographics may play a role in the appreciation of a property. There are some aspects that contribute to the appreciation of a property, these are: recent sale, appreciation history and local business economy. For recent sales, you may want to ask your agent to check public records regarding real estate sales in the neighborhood you plan to reside in. Appreciation history, check whether the prices have appreciated in the previous years. As for local business economy, see if it’s a good location for setting up business.
The value of an asset may rise and fall for various reasons. A decrease in supply and an increase in demand will make the prices go up. Example, a person buys a parcel of land in an area where there are limited lots left for sale, the value is expected to go up if more people desire to buy a piece of land too. Works of art may go up in value as well. If an art of a specific artist is sold for a really high amount, tendency is the other works will be sold at a higher price. The death of the artist may contribute to the appreciation of the work as well since the supply will be limited.
Stocks and bonds are also bound to appreciate if the performance of a company improves. Improvements in performance have a tendency to increase the demand for stocks, which will cause the supply to be limited. People will keep their stocks if the company is doing great. Appreciation and depreciation for assets like foreign currency and securities are caused by market fluctuations.
When the assets appreciate, people are taxed for that. Example, when a property has been re – evaluated by an assessor, taxes will increase as well to reflect its value.
The opposite of appreciation is depreciation. Depreciation is commonly seen in equipments. These equipments are vehicles, heavy machinery, computers and others. Usually, they are worth the money but the value declines over time because of too much use.
There are many variables that determine the increase in value of an asset. These are inflation rate increase, large and good housing, and growth in the local economy, housing supply and demand and affordability.