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 an expert in property classification and taxation, I have a deep understanding of the concepts involved in determining whether property is real or personal. My expertise in this area is grounded in a comprehensive knowledge of legal frameworks, tax implications, and practical considerations.
In the article you provided, the distinction between real and personal property is outlined, and I'll break down the key concepts used:
Real Property:
Real property encompasses land or things attached to land. This includes structures like buildings and any attachments that become part of the land. The term "real estate" or "realty" is often used interchangeably with real property.
Key elements of real property include:
- Attachments: Materials like wood or metal can become real property if attached to land.
- Vegetation: Trees and plants growing on land are considered real property.
- Rights and Benefits: Ownership of real property includes various rights, such as the right of enjoyment, exclusion, possession, disposition, and control.
- Minerals and Airspace: Real property includes minerals under the land's surface and airspace above the land.
Personal Property:
Personal property, on the other hand, is movable and subject to ownership. It is further categorized into chattels and intangibles.
Categories of personal property:
- Chattels: Tangible, movable property like a purse or clothing. Some chattels may become fixtures if attached to land.
- Intangibles: Non-physical property like bank accounts, intellectual property, franchises, licenses, insurance policies, and investments.
Key Differences:
- Mobility: Personal property is movable, while real property is not.
- Ownership: Real property is attached to land and includes ownership rights, while personal property is subject to ownership but is not permanently attached.
Importance of Classification:
The classification of property is crucial for various reasons, particularly in taxation. It impacts how a property is taxed, and changes in classification may lead to tax benefits. Understanding these distinctions is essential for property owners, especially in cases where fixtures may have uncertain classifications.
Fixture Classification:
Determining whether an item is a fixture involves a three-part test:
- Occupation or Attachment: How the property is attached and if removal causes damage.
- Adaptation: How the property is used relative to the real estate.
- Intent: Whether the property is intended to be permanently attached.
Bottom Line:
Classifying real or personal property can significantly affect tax burdens. Due to the potential ambiguity in defining fixtures, property owners are advised to understand local case laws, historical practices, and consult with tax or financial advisors for professional evaluations.
Tips for Property Categorization:
- A financial advisor can assist in navigating tax laws and improving overall financial positions.
- Consulting resources like tax guides and calculators can be helpful in understanding property tax implications.
In conclusion, accurate classification of property is a valuable pursuit, especially for individuals seeking to optimize their tax positions. Consulting with professionals and staying informed about local regulations is key to making well-informed decisions.
