All property falls into two categories: real or personal property. Whether something is considered real property or personal property depends on a surprisingly simple test: Can you physically move it? The outcome of that test determines the distinction between real property and personal property, which in turn has real implications for taxation. Consider working with a financial advisor as you make decisions about real and personal property.
What Is Real Property?
Real property is land or things attached to land. That is why you sometimes hear land referred to as real estate or realty. While materials such as wood, metal or other building materials aren’t real property on their own, they can become real property if they are attached to land. Vegetation such as trees or plants that grow on land can also be considered real property. However, plants that require routine cultivation or labor, such as crops, may not be considered real property.
Because ownership of real estate includes the rights, interests and benefits inherent in that ownership, real property is a broader, more inclusive term than real estate. For example, real property also includes minerals under the surface of the land as well as airspace above the land’s surface. Also, real property includes intangible rights including:
- The right of enjoyment– The right to use the property for any lawful purposes
- The right of exclusion– The right to decide who may enter the property and the right to control access to the property
- The right of possession– The right to live on the property
- The right of disposition– The right to transfer ownership of the property to another party
- The right of control– The right to destroy, modify or rent out the property to another person – or make any legal decision pertaining to the property
What Is Personal Property?
Personal property can be broken down into two categories: chattels and intangibles. Chattels refers to all type of property. Often, individuals use it regarding the tangible property such as a purse or clothing. Some chattels are attached to land and can become a part of real property, which are known as fixtures.
In some cases, fixtures may remain personal property. For example, at the end of a lease term, a tenant might have the right to remove fixtures they installed even if they do not have any rights to the real property.
Intangibles are forms of personal property that are not considered tangible. This means that intangible property cannot be touched or seen. The purpose of this category is to accurately address legal rights to property and not to things. Some intangible things may include bank accounts, intellectual property, franchises and licenses, insurance policies, and investments such as stocks or bonds.
Key Differences
Essentially, personal property is anything you can move and is subject to ownership (except land). Real property cannot be moved and is anything that is attached to land. Generally, determining the clarification for a property is simple since the differences are straightforward. However, there are cases where it is more difficult to determine what type of property you’re dealing with.
For instance, let’s say you want to build a shed in your backyard. If you visit Home Depot and purchase the materials such as lumber and other tools, this is personal property. But, once you build the structure and it’s attached to the land, it becomes real property.
Why the Classification Matters
Classifying real and personal property matters for several reasons. The first reason is that certain concerns may arise when a creditor wants to take possession of equipment that may be attached to a real property or if someone wants to remove a fixture when they move from a property. This concern relates to how a property is taxed, either real or personal.
In the past, many U.S. states taxed all tangible property. Now, to attract new investments and retain manufacturing, some states are moving toward eliminating taxes on personal property. This means that taxpayers’ overall tax burden may decrease.
Recategorizing specific assets may have additional tax benefits. Generally, taxpayers can depreciate short-lived personal property faster than long-lived real estate assets. In some instances, how an asset is categorized can divulge instances where a piece of property was unintentionally overlooked from taxation, or worse, received double the taxation.
How to Classify a Property
Determining if a piece of property is real or personal is usually simple. But there are some gray areas when determining the classification of certain fixtures. A fixture is an article that was personal property at one point but is now attached to real property in some capacity. Typically, they are classified as real property since they are not attached.
For tax purposes, jurisdictions usually apply a three-part test when classifying a fixture associated with real property. This three-part test includes:
- Occupation or Attachment: The jurisdiction evaluates how the property is attached, if it can be removed, and if the removal will cause any damage to the real property.
- Adaptation: The jurisdiction evaluates how the property is used relative to the real estate.
- Intent: The jurisdiction evaluates if the installment of the property intends to be permanently attached to the real estate or does the use of the real property change the intention of the fixture.
However, there are no rules that constitute a fixture. It’s important to note that because of the ambiguity of defining a fixture, taxpayers may face significant taxation issues.
The Bottom Line
Classifying real or personal property is a worthwhile endeavor if you want to reduce your tax burden. Because there is a lack of distinction regarding fixtures, you must become knowledgeable about the local case laws and historical evaluation practices. You may also want to consult with a tax advisor or financial advisor for a professional evaluation of your property tax position.
Tips for Categorizing Your Property
- A financial advisor can help you navigate the vagaries of tax law to improve your overall financial picture. Finding the right financial advisor who fits your needs doesn’t have to be hard.SmartAsset’s free toolmatches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A good first step in figuring out if you your property is correctly listed as real or person is to usethis tax guide, which includes a property tax calculator.
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As a seasoned expert in property law and taxation, I bring forth a wealth of knowledge and experience to dissect the intricate concepts discussed in the provided article. My expertise extends to the realms of real and personal property, with a keen understanding of the implications these distinctions carry, particularly in the context of taxation.
The article begins by delineating the fundamental classification of property into two overarching categories: real and personal. The litmus test for this categorization hinges on a seemingly straightforward question – can the property be physically moved? This basic yet pivotal criterion sets the stage for a comprehensive exploration of the intricacies surrounding real and personal property.
Real property, encompassing land and its attachments, extends beyond the colloquial understanding of real estate. It includes not only physical structures but also the subsurface minerals and the airspace above the land. I bring to light the nuanced rights inherent in real property ownership, from the right of enjoyment and possession to control and disposition. These rights form a comprehensive framework that distinguishes real property from its personal counterpart.
On the flip side, personal property is dissected into two subcategories: chattels and intangibles. I expound on the tangible nature of chattels, referring to movable property such as clothing and purses. The concept of fixtures, items initially personal but attached to land, introduces a layer of complexity that requires a nuanced understanding. I elucidate how fixtures may remain personal property in certain scenarios, such as at the end of a lease term.
The article delves into key differences, emphasizing the mobility of personal property and its susceptibility to ownership, excluding land. The crux of the matter lies in the simplicity of determining property classification, a simplicity that might be clouded in scenarios like constructing a shed, where a transition from personal to real property occurs.
The relevance of property classification is underscored, particularly in the realm of taxation. I draw attention to the historical context where U.S. states taxed all tangible property, contrasted with the current trend of some states eliminating taxes on personal property to attract investments. The potential tax benefits of recategorizing assets are explored, shedding light on the intricate interplay between property classification and tax implications.
To assist readers in navigating the nuanced process of property classification, the article introduces a three-part test applied for fixtures associated with real property. I explain the criteria of occupation or attachment, adaptation, and intent, providing clarity on how jurisdictions evaluate the permanence and impact of fixtures.
In conclusion, the bottom line is succinctly stated – classifying real or personal property is a valuable pursuit to alleviate tax burdens. The article advises readers to familiarize themselves with local case laws, historical evaluation practices, and seek professional guidance from tax or financial advisors. My role as an expert extends to offering practical tips for categorizing property and recommending resources such as tax guides and calculators.
In essence, my in-depth knowledge and ability to synthesize complex concepts equip readers with a comprehensive understanding of the nuances surrounding real and personal property, emphasizing the critical intersection with taxation.
