Lesson 1: Overview
This lesson is intended as an introduction to the topic and discusses the following:
- The definitions of personal property and fixtures, and other terms used throughout this learning session.
- The cost approach to valuation and the mass appraisal method for valuation of personal property and fixtures
- The Board of Equalization's role in promoting uniform assessment, and
- Use of Assessors' Handbook Section 581, Equipment and Fixtures Index, Percent Good and Valuation Factors
Objectives and Format of Learning Session
The objectives of this learning session are to:
- Provide an understanding of the purpose of each type of factor.
- Identify the basis, or source, of each type of factor.
- Demonstrate how to use each type of factor and the factor tables found in Assessors' Handbook Section 581, to estimate the market value of personal property and fixtures for property tax purposes.
In this learning session, instruction is provided through structured reading and illustrated examples. To assist in the attainment of the learning objectives, examples are incorporated within the lessons to illustrate the concept being discussed. Exercises available at the end of lessons are to be worked by participants to ensure comprehension of concepts and calculations discussed in the lesson. A final examination is also available at the conclusion of this session, in order that certified property tax appraisers employed by a California County Assessor’s Office or the Board of Equalization may demonstrate their overall comprehension of the subject matter, attest to their participation in the learning session and receive training credit for completion of the session.
Definitions
Several terms are used throughout this learning session. Below are terms that you should be familiar with as you proceed through the lessons.
- Personal Property: is, for California property tax purposes, all property except real property. (California Revenue and Taxation Code section 106)
- Fixture: is an item of tangible property, the nature of which was originally personal property, but which is classified as real property for property tax purposes because it is physically or constructively annexed to real property with the intent that it remain so indefinitely. (Property Tax Rule 122.5)
- Market Value: is defined, for California property tax purposes, as the amount of cash or its equivalent that property would bring if exposed for sale in the open market under conditions in which neither buyer nor seller could take advantage of the exigencies of the other, and both the buyer and seller have knowledge of all the uses and purposes to which the property is adapted and for which it is capable of being used, and of the enforceable restriction upon those uses and purposes; also referred to as “full cash value” or “fair market value”. (California Revenue and Taxation Code section 110)
- Cost: is the expenditure required to develop and construct an improvement – fixtures are improvements and improvements are real property – or acquire personal property, including applicable sales tax, shipping charges, and installation costs.
- Taxable (Assessable) Property: is, for California property tax purposes, all property unless it is exempt from taxation. Section 1 of Article XIII of the California Constitution specifies that unless otherwise provided by this Constitution all property is taxable and shall be assessed at the same percentage of fair market value. In addition, personal property may be exempted, in whole or in part, by the Legislature.
The Cost Approach to Valuation
The valuation of personal property and fixtures for assessment purposes most often involves the use of a mass appraisal method. The Cost Approach to value is the method of valuation used most often to value assessable personal property and fixtures. This is because the cost approach lends itself to mass appraisal and it can be readily employed using the information contained in annual property statements. Property statements are declarations, filed by businesses, which report all assessable property owned, claimed, possessed, controlled, or managed by the filer at a specific situs (location). Property statements are filed with the County Assessor’s Office, for the county, in which the property is located. Property costs are reported by category and year of acquisition.
The cost approach to value is the process by which the market value of property is estimated by adjusting the property’s acquisition cost to account for changes in value since the property’s acquisition and installation. These adjustments are commonly done through the use of factors:
- Index Factors: represent price level changes experienced since acquisition.
- Percent Good Factors: reflect depreciation (loss of value) suffered since acquisition.
- Valuation Factors: combine both price changes experienced and depreciation suffered, in a single factor.
Further discussion on the cost approach as it pertains to the valuation of personal property and fixtures is available in Assessors' Handbook Section 504, Assessment of Personal Property and Fixtures which is available on the State Board of Equalization's website at: Assessors' Handbook
Uniformity of Assessment
Revenue and Taxation Code section 401.5 provides that the State Board of Equalization shall issue to county assessors data relating to costs of property and other information to promote uniformity in appraisal practices and assessed values throughout the state. Pursuant to that mandate, the Board annually publishes Assessors' Handbook Section 581, Equipment and Fixtures Index, Percent Good and Valuation Factors.
Assessors' Handbook Section 581 is available on the Board's website and can be accessed through the following link: Assessors' Handbook. The website contains many years of this publication.
Use of Assessors' Handbook Section 581
Assessors' Handbook Section 581 contains several tables of index, percent good, and valuation factors that will aid in the mass appraisal of various types of personal property and fixtures to produce estimates of market value.
The use of factors to estimate the lien date market value of business equipment (personal property) and fixtures usually occurs in one of two methods:
- A property’s acquisition cost is multiplied by an index factor to produce an estimate of the property’s reproduction cost new or replacement cost new. The result is then multiplied by a percent good factor to produce an estimate of the property’s reproduction or replacement cost new less normal depreciation – indicators of the property’s market value as of lien date (January 1).
- Where the business equipment and/or fixtures have been the subject of a Board Valuation Factor Study, a property’s acquisition cost is multiplied by a valuation factor – which includes both price index and depreciation components – to produce an estimate of the property’s market value as of lien date (January 1).
The next lessons will discuss specific application of each of the factor tables in Assessors' Handbook Section 581 (AH 581). In all lessons, the factors from AH 581 for the January 2011 lien date will be used for illustrative purposes.
- Lesson 2 discusses application of index factors for commercial, industrial, agricultural and construction equipment to calculate reproduction/replacement cost new.
- Lesson 3 discusses application of percent good factors for commercial, industrial, agricultural mobile, and construction mobile equipment to calculate the reproduction/replacement cost new less depreciation of the equipment.
- Lesson 4 addresses application of valuation factors for the following equipment types: non-production computers, semi-conductor manufacturing, biopharmaceutical, document processor, and offset lithographic printing presses.
- Lesson 5 discusses determination of economic life, average service life, which is a component used in application of percent good factors.
- Lesson 6 addresses adjustments to index factors where necessary to account for technological changes that may have taken place for certain types of equipment.
- Lesson 7 identifies the valid cost components to include in the original or historical cost of equipment to which either index and percent good factors or valuation factors are applied.
Please print the following PDF containing the tables from the AH 581 which can be used throughout the training:
2011 AH 581 Factor Tables