F1: MARKET VALUE OF EQUIPMENT OVER TIME
2 years 4 years 6 years 8 years 10 years
Appraisal district straight-line depreciation
Actual market value over time
*Shaded area represents excess valuation based on appraisal district straight-line depreciation
INTANGIBLE PERSONAL PROPERTY
Intangible personal property is not real estate and can’t be seen, felt, touched or moved.
Examples of intangible personal property include stocks, bonds, accounts receivable,
other financial assets, contracts, software, patents, trade secrets, and other types of
EXTRACTING INTANGIBLE PERSONAL PROPERTY FROM ASSETS
WITH BOTH TANGIBLE AND INTANGIBLE COMPONENTS
A Cisco phone system is a good example of the complexity of separating tangible and
intangible personal property. The purchase of a Cisco phone system includes hardware,
a maintenance contract and installation.
In 2016, Cisco’s cost of goods sold was $18.3 billion versus $49.2 billion in sales –
COGS were only 37% of revenue. Based on the writer’s experience, the cost of hardware
is less than half the cost of a Cisco phone system. The maintenance contract and
installation exceed half of the cost. The maintenance contract is not tangible personal
property. The cost of installation will need to be capitalized for federal tax purposes,
but is not tangible personal property. Only a portion of the cost of equipment is tangible personal property subject to personal property taxes.
There is not a simple way to separate the tangible and intangible components of
the equipment for a complex system such as a Cisco phone system.
FREIGHT, SETUP COSTS AND SPECIALIZED BUILDINGS
TO HOUSE EQUIPMENT
The cost of freight, setup costs and specialized buildings are included in federal tax
depreciation schedules. These costs should be excluded before attempting to value
the tangible personal property.
VALUATION OF PERSONAL
PROPERTY BASED ON COST
Personal property is valued on the cost
approach. The cost new less depreciation.
Types of depreciation include physical,
functional, and external.
Following is a summary of each of the
three types of depreciation:
• Physical depreciation – This is caused
by wear-and-tear, or the normal aging
process that negatively impacts the
• Functional depreciation – This is
caused by errors in design or changes
• External depreciation – This is also
known as external obsolescence. For
real estate, it is defined as anything
outside the real estate parcel that
causes a reduction in value.
For oilfield equipment, the sharp drop
in the demand for oilfield services has
led to auction sales of large amounts of
oilfield equipment. This equipment is
selling for much less than the price indicated by a straight-line depreciation
For equipment in general, external
obsolescence is the reason that used
equipment does not sell for a value based
on straight-line depreciation tables. Most
appraisal districts use a seven to 10-year
life for office equipment. Hence, a one-year-old chair that cost $300 new would
be valued at $252 to $270 based on
straight-line depreciation. However, the
market value is likely only $25 to $100 –
the difference between the straight-line
depreciation value and the market value
is caused by external depreciation (
assuming there is no functional obsolescence). See Figure 1.
Appraisal district instructions for rendering tend to encourage property owners to render cost and year of acquisition.
However, they do not clarify that this
information will be used to calculate an
estimate of market value using straight-line depreciation which no state-licensed