Appreciation vs depreciation vs amortization differences

The difference between amortization vs appreciation vs depreciation differences is

Appreciation

Appreciation is the rise in value of something over time.

Example

If you buy a house for $100,000. Over time, let’s say one year later, the house goes up in value to $110,000. This means that the value of the house appreciated for $10,000

If you were to sell the house at $110,000 this mean that you have a capital gain of $10,000 which means that you only pay taxes on $10,000.

why? ( 110,000 sales price – 100,000 basic ) = 10,000

Things to know:

The taxes that you pay on long term capital gains (more than a year) depends on what tax bracket you are.

The taxes that you pay on short term capital gains (less than a year) are tax as ordinary income.

Example

If you buy a share of stock for $100 dollars. Over time, let’s say one year later, that same share of stock goes up in value to $110 dollars. This mean that the value of the share appreciated for $10.

If you were to sell the share of stock for 110 then you only pay taxes on $10

Amortization

Amortization is when you take a sum of money. Usually a loan and pay it over time which in turn reduced the total amount owe until it gets to zero.

Example

If you were to take a $100,000 loan at 5% interest per year, for 12 months

the total principal paid will be $100,000

total interest paid will $2,728.98, not $5,000 (simple interest)

the reason for this is that every month you make a payment, you paying less compound interest.

and

the monthly payment amount will be $8,560.75

Depreciation

Depreciation is similar to amortization, the difference is that amortization charges off the cost of intangible assets while depreciation charges off the cost of tangible assets or fixed assets.

example

A vehicles loses value as time passes, so it depreciate in value. A car is tangible.

Buildings are tangible assets. So they can depreciate in value as time passes.

That’s it.

Take a calculated risk.

Now, start and adjust as you go.

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