Overlooked When Filing Property Taxes: Functional Obsolescence for Underperforming Equipment

By Gary A. Stone, ASA, Manager at Swartz and Associates

Recently, I was working at the office when I received a text from my college-aged son, “hey, why is it 80 degrees in the house and why can’t I change it to go down?”. My air conditioner had stopped working on one of the hottest days of the year. To add insult to injury, it had just been installed a couple of weeks earlier, along with a new furnace.

As an aside, have you ever noticed this never happens on cooler days? But I digress. The technician came out and reset the unit, and it worked for a while. Unfortunately, it took several visits and adjustments from the HVAC company before the system finally began running properly.

Many businesses that own heavy machinery can relate to my experience. Whether it’s a manufacturing line or equipment that produces energy, newly installed equipment does not always run properly from the start. It may take several adjustments or modifications to “work the bugs out”.

When providing valuation services, we occasionally come across clients dealing with underperforming equipment. Part of our scope of work is interviewing key personnel to determine whether the issue is curable or incurable. If the cost to cure is not economically feasible, the deterioration of the equipment is considered incurable and will have a negative effect on the value of the equipment.

Functional Obsolescence

This loss in value is called functional obsolescence, which is a loss in value or usefulness due to problems with its design, features, or layout. The equipment may still be operable, and it can occur regardless of age and is separate from wear and tear (physical depreciation) or economic changes (economic obsolescence).

This is often overlooked when businesses file their property tax statements. County assessors rely on state-mandated depreciation schedules when valuing equipment, which only account for physical deterioration. Therefore, if a business owner has underperforming equipment, they could be overpaying the property tax on that equipment.

We have helped many clients with this issue including a current case in California. Because of our experience, we know the pertinent questions to ask, the proper documents to submit, and how to work with the property tax jurisdictions. If you think this might apply to you, let’s talk. We would be happy to provide you with a consultation to assess your situation.

Swartz + Associates, Inc. (SAI) is a full service property tax firm specializing in the review, analysis and appeals of real and business personal property tax valuations. If you need help with your property taxes, give us a call!