All property falls into two categories: real or personal property. Whether something is considered real property vs. 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.
Understanding Real Property
Real property refers to land and anything permanently attached to it. This is why land is often called real estate or realty. While materials like wood, metal, or other building supplies aren’t considered real property on their own, they become part of real property once they are attached to the land.
Vegetation, such as trees or plants growing on the land, may also be classified as real property. However, crops that require regular cultivation or labor might not fall under this category.
Ownership of real estate extends beyond just the physical land; it includes the rights, interests and benefits associated with owning it. This makes real property a broader concept than real estate. For instance, real property encompasses not only the land itself, but also the minerals beneath the surface and the airspace above it.
Real property also 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
Understanding 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 don’t 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.
Real Property vs. Personal Property: Key Differences
Personal property refers to items that are movable and owned, excluding land. In contrast, real property consists of things that are immovable and attached to the land. While the distinction is generally clear, there can be situations where it becomes tricky to determine the type of property in question.
For example, if you decide to build a shed in your backyard, the materials you purchase, like lumber and tools from a store such as Home Depot, are considered personal property. However, once you construct the shed and it becomes fixed to the land, it transitions into real property.
Why the Classification Matters
Classifying real property vs. 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 lead to instances in which 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.
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.
Bottom Line
Classifying real property vs. 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 tool matches 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 use this tax guide, which includes a property tax calculator.
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