Which assets cannot be depreciated? 7 assets never depreciate
Nobody wants their asset to lose value. Particularly when it comes to investing. However, depreciation does not apply to all assets. In this article, we will discuss which assets cannot be depreciated.
YouTube Channel
Because it does not wear out over time, a YouTube channel is not considered a depreciable asset. Depreciation is an accounting method for spreading the cost of an asset over its useful life.
However, contents on YouTube Channel have no shelf life, and the more views a video receives, the more value it generates.
With AdSense, YouTubers can earn anywhere from $0.01 to $0.03 per view, with an average of $0.18 per view. This means they can earn an average of $18 per 1000 views.
That means, as time passes, the value of the YouTube channel with content will only appreciate rather than depreciate. Because, as long as you don’t remove the video, the number of views will increase rather than decrease. As a result, the video’s worth is increasing rather than decreasing.
A good example is Mr. Beast’s YouTube channel. He started with almost 0 investment in building his YouTube channel when he was a teenager, but now his YouTube Channel makes at least 3 million each month.
Trademarks
A trademark’s effective legal term is 10 years from the date of application. However, if you renew it before it expires, you can use the trademark indefinitely.
A trademark has an infinite useful life and cannot be worn out or used up physically. As a result, once registered, it is rarely depreciating. The trademark registration fee in the United States is $350 and it may be worth considerably more over time.
For example, according to statistics, the Nike brand was worth 33 billion US dollars in 2022, representing an almost 3 billion US dollar increase over the previous year.
Trademarks can be licensed through legal processes as well, which makes this intangible asset more valuable.
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One trademark licensing example is FIFA. FIFA hosts the World Cup every 4 years and FIFA owns the FIFA World Cup trademarks. EA Sports releases a new game every year and now pays FIFA an annual trademark licensing fee of $150 million.
Copyright
Copyright protects the creators’ original works of art, publishing, music, and other creative intangible assets. Copyrights, like trademarks, have an infinite useful life and are not considered depreciable.
According to Forbes, Jay-Z is one of the highest-paid musicians of all time, with an annual music royalty revenue of $110 million. This revenue is generated through a variety of music services, including Spotify, Apple Music, Amazon Music, and YouTube.
In the United States, a song’s copyright protection lasts for the lifetime of the copyright holder. As a songwriter, Jay-Z can receive royalties on any of his songs’ sales, which will continue to generate cash for him.
Book writers also benefit from the ownership of their publication. After a book is published, the author earns a percentage of sales for each book sold, which is “royalty,” The standard royalty cut is 10% and this royalty is paid until 70 years after the author’s death.
JK Rowling still owns the Harry Potter IP, which implies that any work created using Harry Potter pays Rowling royalties from sales.
In 2017, the movie of “Harry Potter” series generated more than $7.7 billion, which implies she received at least $1.15 billion only for the movie copyright authorization.
Gold
In Ancient Rome, an ounce of gold could purchase a toga, which was a decent men’s suit at that time. Gold is now priced at $1,876.82 per ounce as of January 11, 2023. That means one ounce of gold is still worth the price of (or more than) a decent men’s suit.
As a result, some investors utilize the gold-to-decent-suit ratio to show the stability of gold’s purchasing value. Gold is held as a hedge against inflation and currency depreciation. Because gold does not depreciate like a currency, investing in gold will always result in value retention or a rise.
Nothing predicts the gold price better than inflation and gold has historically been an effective inflation hedge. In recent several months, Gold has reached a 6-month high, and experts predict further highs in 2023. When it comes to retaining value, gold has always outperformed cash in a bank account.
Although we can observe the price of gold is fluctuating in the short term, it has always maintained its worth in the long run.
Vacant Land
Even IRS mentioned, “Land will never be depreciated.” Because land is supposed to have an infinite useful life, it is not depreciated. Other assets on top of the land, such as a building or a cottage, all have a useful life. That means the building itself should not be the target of investment.
So, we should remember when we buy a house for investment, we are looking for the land value itself, rather than the cement blocks on top of it.
Buying vacant Land is a “Hands-Off” Investment. It is a relatively affordable investment since there are no maintenance, insurance, utility, or other costs associated with owning the land. Even vacant land has cheaper property taxes than a house, making the land an ideal investment if you don’t want to deal with all of this.
Land value appreciates because supply is limited; also, as the population increases, the demand for land is going up, driving up land prices over time.
The world’s most notorious land transaction happened in 1626 when Dutch immigrant Peter Minuit acquired the New York Manhattan Island, which covers 15,000 acres for 60 guilders’ worth of commodities (about $24 today).
Now how much is Manhattan Island? It is worth $1.4 trillion.
The value of land can rise or fall depending on its location. The proximity to utilities and roads, as well as the frequency of natural disasters, all have an impact on land value in the short and long term. So before purchasing land, you should conduct thorough research.
Collectible artworks from prestigious artist
Again, according to the IRS, depreciation of works of art is typically not permissible because it does not ordinarily limit or determine useful life.
Whether you like Vincent van Gogh’s abstract paintings or not, they are undoubtedly valuable. Other artworks from prestigious artists also frequently appreciate value over time.
The fine art industry is still booming. Every day, we can hear that another auction record for “the highest price in history” is broken.
In 2017, Leonardo da Vinci’s “Salvator Mundi” was sold for $450,312,500, setting a new record-high price for an artwork.
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Before this painting was sold for £45 ($72) to a man named “Kuntz” at a Sotheby’s London auction on June 25, 1958. We can see the value of this artwork has increased 6 million times in less than 60 years.
High demand and scarcity drive raises the price of artworks. That is why artwork by a deceased artist is more likely to appreciate in value since the artist can no longer create new works. When there is a limited quantity of artwork available, the artwork’s price is more likely to rise.
The market value of an artwork is formed mostly by galleries and auction houses. The relative reputation of the artist who created the piece is one of the most essential variables in determining the price. Therefore, you will never go wrong by purchasing artwork from a renowned artist.
An asset leased or rented
An asset that is rented rather than owned is one sort of asset that is not eligible for depreciation. The lessee does not have legal ownership of the asset because it is leased. As a result, the lessee is unable to claim depreciation on the asset.
That is why many people advise leasing a car with a high depreciation rate and buying a vehicle with a low depreciation rate.
The BMW 7 Series is a full-size luxury sedan with a starting price of $94,295 that provides a premium ride experience. However, it is also well known for having the greatest depreciation rate of 56.9% after 5 years. So, if you want to drive this car, you should lease it rather than buy it.
On the other hand, companies can claim depreciation of an asset only if they legally own it. Because a company leasing an asset does not have legal ownership of the asset, it cannot depreciate it.
For example, if a company rents a delivery truck for 3 years, the vehicle cannot be depreciated on its financial statements for tax purposes. But the lease payments can be recorded as an expense on the company’s operating costs for the period of the three-year lease period.
Conclusion
In conclusion, not all assets are eligible for depreciation. It is important to understand the rules for depreciation and which assets are eligible in order to properly plan your investment portfolio and calculate the cost of assets to claim any applicable tax deductions.
