Real Property vs Personal Property: Key Differences and Examples

You may have heard the terms real property and personal property, but what’s the difference? And why does understanding the difference between these property types matter? Real property and personal property have different implications, so knowing the difference can help property owners or estate planners make more informed tax decisions.

Keep reading for a breakdown of real vs personal property, including examples and the difference between real and personal property.

What is real property? What is personal property?

All property falls into two categories: real property and personal property. A simple test to determine whether something is real or personal property is to ask, “Can it physically be moved?” The answer will inform the property classification and possible taxation implications.

In other words, the main difference between real property and personal property is that real property is land and any permanent structures on it. On the other hand, personal property is anything else you can own. The exact definitions will depend on the jurisdiction, but let’s cover an overview of real and personal property.

Real property definition

Real property, or real estate, usually means “land and improvements to land.” Think of real property as land plus anything that grows from, is built on, or is attached to land. Some examples of real property include:

• Homes
• Land itself
• Plants growing on the land
• Groundcover (woodchips, gravel, etc)
• Gazebos, sheds, and outbuildings
• Treehouses
• Driveways and sidewalks
• In-ground pools
• Garages
• Fences
• Water, airspace, crops, minerals, or other natural resources

Improvements to land include inherently permanent structures (buildings, fences, parking facilities) and things that are integrated into or are structural components of the structure (furnaces, doors, security systems). Here are some more key characteristics of real property:

1. Ownership rights: Real property owners can use and occupy the land and sell or transfer ownership.
2. Property transfer: Real property can be transferred through a deed, which must be reported to the county or state where the property is located.
3. Legal protections: Real property is subject to legal protections like zoning laws and building codes.

Personal property definition

Personal property, sometimes called movable property, refers to anything that isn’t classified as real property and can be moved from one location to another. The IRS categorizes personal property as tangibles and intangibles.

• Tangible personal property: It includes items like cars, clothes, furniture, artwork, collectibles, and anything else that isn’t attached to real estate.
• Intangible personal property: It includes patents, copyrights, stocks, bank accounts, or intellectual property.

Here are some more key characteristics of personal property:

1. Ownership rights: Owners of personal property can use, sell, or transfer ownership.
2. Property transfer: Personal property can be transferred through a bill of sale or another legal document showing proof of ownership.
3. Legal protections: Personal property is subject to legal protections such as copyright and trademark laws.

Where definitions can blur

Generally, real property or real estate is immovable, while personal property is movable. However, there are some situations where legal quirks can make classifying property more difficult.

It is possible for property to change from real to personal property. For example, fixtures can be a part of real property and personal property. When the fixture is attached to the land, it can be classified as real property. But, at the end of a lease term, for example, a tenant may have the right to remove the fixtures they installed, reclassifying them as personal property.

Sometimes, property isn’t easily classifiable, so get expert help for guidance if you have questions.

How property is classified  

As mentioned earlier, there are sometimes gray areas when classifying property. There’s a three-part test to classify a fixture associated with a property for tax purposes. The test includes:

1. Occupation/attachment: It evaluates how the property is attached, if it can be removed, and if the removal will cause any damage to the real property.
2. Adaptation: It evaluates how the property is used in relation to the real property.
3. Intent: It evaluates if the property is installed with the intent to be permanently attached or if the use of the property changes the intention of the fixture.

Why the difference between real and personal property matters for taxes

The differences between real vs personal property can impact your taxes. It could come into play if you’re a property owner or real estate agent, are writing a will, or are managing the property assets of a recently deceased family member. Since real property and personal property can apply in different contexts, classifying them correctly is essential.

1. Some types of property may be treated differently by tax laws. Knowing a property’s classification can help determine if any tax exemptions may apply.
2. Owning real property can be an excellent investment, but it’s crucial to understand the finances involved, like property taxes and appreciation.
3. Some states will allow for a transfer on death (TOD) deed to transfer ownership of real property to someone else at the moment of death. This is typically used for real property, but some states will allow it for certain types of personal property, too. 

Note: Each property type has different legal protections and transfer processes. Failing to understand the difference between real property vs personal property can lead to legal complications or disputes. Speak with a legal professional for details.

More help with real and personal property

Knowing how to classify real and personal property is worthwhile when it comes to reducing your tax burden. If you’re a property owner with tax questions, we’re here to help.

Get back to doing what you love and let our experts lighten your load, in person or virtually, year-round — as always — backed up by the Block Advisors guarantees. Our taxes, bookkeeping, payroll, and incorporation services are designed with small business owners like you in mind.

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This article is for informational purposes only. The content may not constitute the most up-to-date information and should not be construed as legal advice.