Depreciation - Functional and Economic Obsolescence
Functional and Economic obsolescence require reasons or causes per their definition in the AAM page
4-51(below). I was unable to find these reasons or causes in the JCBOE files. It would be helpful for
taxpayers to know what is considered functional and economic obsolescence to know if their home
meets these same conditions and to understand why these property tax reductions where granted.
Requiring reasons or causes be documented would also help prevent sloppy work and make auditing
easier. When functional obsolescence is used to reduce valuation to $60,000 below the price the
property just sold for, reasons or causes must be documented.
Why is it the ADOR position that these reasons or causes are not to be documented and made
available to the taxpayer?
From AAM page 4-51
Depreciation may be dissected into two general categories: physical deterioration and obsolescence.
Obsolescence is further separated into functional obsolescence (which is internal to the property) and
economic obsolescence (which derives from causes external to the property).
Functional obsolescence arises from characteristics within the structure. It represents a loss in value
from any of several causes, including: outdated architectural style or faulty planning; antique,
out-of-date, or eccentric design; over-capacity or inadequacy; lack of modern convenience or safety;
outmoded equipment (inefficiency); lack of aesthetics; and other reasons.
Economic obsolescence arises from sources external to the building, other than changes in the value of
money. Causes are numerous and include: oversupply of properties of comparable utility and
desirability; legislative enactments limiting property rights; aging of residential or commercial districts;
changes in zoning and land use; locational influences; loss of neighborhood integrity - advent of
inharmonious influences (nuisances, etc.); under-improvement of surrounding properties; changes in
consumer tastes or preferences; changes in community development trends (e.g., shifts in the areas of
the city or county in which people desire to reside, shop, or to be entertained, etc.); and other causes.
Functional and Economic obsolescence require reasons or causes per their definition in the AAM page
4-51(below). I was unable to find these reasons or causes in the JCBOE files. It would be helpful for
taxpayers to know what is considered functional and economic obsolescence to know if their home
meets these same conditions and to understand why these property tax reductions where granted.
Requiring reasons or causes be documented would also help prevent sloppy work and make auditing
easier. When functional obsolescence is used to reduce valuation to $60,000 below the price the
property just sold for, reasons or causes must be documented.
Why is it the ADOR position that these reasons or causes are not to be documented and made
available to the taxpayer?
From AAM page 4-51
Depreciation may be dissected into two general categories: physical deterioration and obsolescence.
Obsolescence is further separated into functional obsolescence (which is internal to the property) and
economic obsolescence (which derives from causes external to the property).
Functional obsolescence arises from characteristics within the structure. It represents a loss in value
from any of several causes, including: outdated architectural style or faulty planning; antique,
out-of-date, or eccentric design; over-capacity or inadequacy; lack of modern convenience or safety;
outmoded equipment (inefficiency); lack of aesthetics; and other reasons.
Economic obsolescence arises from sources external to the building, other than changes in the value of
money. Causes are numerous and include: oversupply of properties of comparable utility and
desirability; legislative enactments limiting property rights; aging of residential or commercial districts;
changes in zoning and land use; locational influences; loss of neighborhood integrity - advent of
inharmonious influences (nuisances, etc.); under-improvement of surrounding properties; changes in
consumer tastes or preferences; changes in community development trends (e.g., shifts in the areas of
the city or county in which people desire to reside, shop, or to be entertained, etc.); and other causes.
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