Real vs. Personal Property—What’s the Difference?

Property can be classified into two categories: real and personal. Typically, property that can be physically moved, like clothing items, falls under personal property while permanent things like land are categorized as real property.

But why does it matter how a property is categorized? Understanding the distinction between real and personal property is key for legal and tax reasons. Here’s a detailed breakdown of the two.

Real property

Real property refers to land and anything that is permanently attached to it. For example, trees naturally growing on land, houses built on land, and structures like fences attached to the land, can be considered real property.

Resources like minerals, oil, and gas that have not been harvested from the land also come under real property as they’re still a part of the land.

The important distinction here is that construction materials like metal aren’t considered real property unless they’re used to build a house or other land-based structures.

Personal property

Generally, movable things come under personal property. These can include everyday items like clothing, but also intangible things like bank accounts and licenses. You can think of it as items that can be moved around, have ownership rights, and can be transferred to others without affecting the land or real property attached to it.

Why the difference matters

The biggest reasons to maintain clarity between what constitutes real vs. personal property are tax and legal purposes.

Taxes

Personal property like clothing may not be heavily taxed, while real property like houses almost always carry some form of significant taxes.

Insurance

Insurance coverage tends to vary depending on the nature of the asset. For example, homeowners insurance policies are quite different from insurance policies for valuables like jewelry.

Legal implications

This distinction is necessary to stay within legal rights during buying, selling, and transfers. Different laws govern real and personal property, influencing ownership rights. Real property is subject to real estate laws, which include zoning laws, land use regulations, and property rights such as easements. Ownership of real property also confers rights to use, lease, or sell the land and attached structures. In contrast, personal property is governed by personal property laws that manage possession, transfer, and security interests. For example, a creditor may have different rights and processes for repossessing a car (personal property) compared to foreclosing on a house (real property).

Classification test

The simple test

Determining the classification of property hinges on whether the item would remain with the sale of the land. Immovable items are categorized as real property, while movable items fall under personal property. This simple test is a straightforward way to differentiate between these two types.

For example, if you’re selling your home, the built-in kitchen cabinets would typically be considered real property, as they are permanently attached to the structure, and would remain with the house after the sale. Conversely, a free-standing refrigerator, which can be moved without affecting the property, would be personal property.

Principles for classification

The permanence of attachment to the land serves as a primary determinant for classifying an item as real property. In practical scenarios such as estate planning or property disputes, accurate classification is crucial.

For instance, during estate planning, the decision on how to transfer assets often depends on whether the items are considered real or personal property. Some states allow the use of a Transfer on Death deed to transfer real property immediately upon death, bypassing probate. This is typically not available for personal property, although certain states do allow TOD for specific items such as vehicles.

When it comes to property disputes, a common issue is the treatment of fixtures. A fixture is an article that was once personal property but has become attached to real property, such as lighting fixtures or a built-in bookcase. The fixture is usually considered real property due to its attachment, which, in turn, impacts tax implications and ownership rights.

Consult experts for classification

Such knowledge of the difference between real and personal property can aid in informed decision-making regarding property ownership and rights, ensuring proper handling and compliance with relevant laws and regulations.

However, as an everyday user, this may not always be easy. In such cases, it’s recommended to consult lawyers and property experts for the right guidance on how the property may be categorized and what will be the legal and tax implications of such a classification.