Durability but not permanent lose is the way to go.
Well, Permanant Loss would be the penalty of not paying attention to the condition of one's gear and having it maintained regularly. If it breaks, then it needs to be reforged or replaced. No item, even epic loot should be immune to this.
Having gear serviced should never affect its maximum status the way it did in SWG. In that game, when there was gear decay, if you repaired something, its maximum durability was decreased, eventually leading to MANDATORY replacement.
It should never require mandatory replacement unless the player refuses to pay attention to the condition of the gear. A GUI icon should show when any gear is below a certain durability threshold. So there would really be no excuse for letting equipment break.
Reforging would be done at the blacksmith as well, but like maintenance kits, would require that the blacksmith has special materials in stock... Scraps of leather. Metal plates. Ingots. Ore. etc... The blacksmith would make components if he has the materials to make them. It would be nice to have alternative uses for resources we find other than using them in our own crafting activities or just selling them to other players. Blacksmiths should always buy these things.
The Reforging of epic gear should be expensive because the materials needed to reforge it would be rare or highly refined. But one would never actually LOSE what has been gained, but if it is broken, then until it is reforged, it is useless.
As to the mystical gear that in games like Arena or Daggerfall, which were only temporarily yours and would go away after a time, I'd like to see these unique thing back for TESO. They would not be subject to wear and tear like above, but rather available for a limited time. Say, 30 days, regardless of where they are stored. There should be many places scattered all over Tamriel where one of these items would spawn at. Shrines, Dungeons, Caves, random places out in the open world. These type things would encourage exploration. If nobody knows where these items may be found, and no one person may own them for more than a month, then even places that have been visited before might be worth visiting again. Nothing will prevent someone from finding these unique items again, but it would be by chance, not by intent... Unless he manages to successfully find it again by going from one possible resting place to another all over the land before someone else happens upon it. And that will not be an easy task