You might have come across the terms "real property" and "personal property," but what are the differences between the two? Let's take a look at what differentiates these two types of property.
Real property typically refers to real estate. It is property that is permanent, including the land itself and improvements made on it. By contrast, personal property is all other kinds of property. An easy way to distinguish between the two is whether or not a particular property can be moved. If it cannot be moved, it is real property. If it can be moved, it is personal property.
Take a closer look at the differences between personal and real property, including examples of each and how they are handled in taxation.
Real Property vs. Personal Property: Understanding the Difference
Whether filing your taxes, making a list of your assets, or selling your home, you will come across the terms real property and personal property. Knowing the crucial distinctions between the two is important because it will affect your taxes.
What Determines Real Property vs. Personal Property?
The most important factor determining whether something is real or personal property is whether it is permanent or can be easily moved. In practice, real property is usually real estate.
Some examples of real property include:
Examples of personal property include:
- Computers and other electronics
Some properties can be more difficult to classify. For example, trees and plants are real property when they are part of the landscape. But plants that require regular attention, such as crops, may be considered personal property.
Categories of Personal Property: Chattels vs. Intangibles
It is also worth noting that there are two categories of personal property. Chattels are tangible, like clothing or jewelry. Chattels can also apply to fixtures attached to land, so they could be considered real property. The difference, however, is that a fixture is not quite as permanent and can be easily dismantled. The most common example is when someone renting a home chooses to remove fixtures they installed so they can bring the fixtures to their next home.
Intangibles are personal property that you can't see or touch. Common examples are franchises, intellectual property, investments, insurance policies, and bank accounts.
Solar Project as Personal vs. Real Property
Solar projects are a common example of property that can be complicated to classify. Solar panels are usually attached to buildings. But the issue is whether or not they are considered a permanent attachment. They are mounted to real property but can easily be removed without much effort.
On top of that, the fact that people typically rent or have extended payment plans for solar panels further complicates matters. Homeowners who do this don't actually own the solar panels that are attached to their homes. Despite these factors, solar panels are more commonly considered real property, not personal property. This is the official stance in New York State as of August 2020.
Mobile Homes as Personal vs. Real Property
Mobile homes are also another type of property that's difficult to classify. Classification will depend on a few important factors. Generally, a mobile home is a real property if:
- You own the land it sits on.
- It is permanently fixed on a foundation.
- Its wheels are removed.
Otherwise, mobile homes are usually considered personal property.
Fixtures as Personal vs. Real Property
As mentioned, fixtures can be an example of a chattel type of personal property. However, there will be times when fixtures are considered real property, which makes them hard to classify. Most jurisdictions will look at three factors to determine if a fixture is a personal or real property:
- How it is attached and whether it can be removed without damaging the real property
- How the fixture is used in relation to the real estate property
- If the fixture is intended to be permanent
Unfortunately, the rules that determine which category fixtures fall into aren't very clear. This can make it more complicated for taxpayers when filing their taxes for personal property. Therefore, consulting a tax accountant is the best step to take for matters like these.
Some Key Differences Between Real and Personal Property
We've discussed that permanence is the main difference between real and personal property. Real property is permanent and well-attached, while personal property is movable. There are also a few other crucial differences to keep in mind.
- Durability: Real property tends to be more durable than personal property, although there are exceptions.
- Depreciation: The value of real property usually increases over time, while the value of personal property typically depreciates. A good way to illustrate this is to compare the long-term value of a house versus a car.
- Ease of purchase: Buying real property is usually a more complicated process compared to the ease of buying personal property. To illustrate once more, buying a car tends to be less complicated than buying a house.
- Taxation: Nearly every jurisdiction charges tax on real property, but most only charge tax on personal property used for businesses.
- Tax deductibility: You can usually deduct real property taxes if you opt for itemized deductions. By contrast, you can only deduct some personal property taxes.
- Classifications: You can classify personal property as tangible/chattel or intangible. Real property has more classifications, such as commercial, residential, agricultural, and industrial.
Real Estate Taxes vs. Personal Property Taxes
Taxes are the biggest reason why it is important to understand the difference between personal and real property.
Real Estate Taxes
As a refresher, the taxes you must pay on your real estate or real property are called property taxes or real estate taxes. Your real estate taxes fund projects and initiatives of your local municipality and county, such as schools, fire departments, libraries, police, and so much more.
Every state, city, and county has its real estate tax rate. It can even vary based on the school district. You can calculate how much taxes you are required to pay by multiplying the local tax rate by your property's assessed value.
Your home loan may include property taxes already. If this is the case, they are held in escrow when you pay them, and your lender sends the property taxes to the local government when necessary. You may get an additional bill or refund if the estimate is inaccurate. If you don't have property taxes built into your mortgage or don't have an existing mortgage, you will pay for these at your local tax office. You should receive instructions and a bill in the mail.
Personal Property Taxes
Personal property may or may not be included in your tax assessment. It will vary depending on the type of personal property and your jurisdiction. In some cases, calculating them will be based on the percentage of the property's value. This means that the amount of personal property tax to pay on an item, if applicable, will typically decrease over time as the item loses value. In other cases, you will be required to pay a flat fee.
There are also cases when taxes are built into service fees, so you don't realize that you are already being taxed. One example of a service with a built-in tax fee is your yearly car registration. This is essentially a personal property tax but isn't structured as one.
Overall, personal property taxes tend to be significantly lower than real property taxes. This is partly due to the fact that personal property usually has a lower value than real property. Usually, personal property also has a lower tax rate.
Some businesses may be required to pay personal property taxes on their furniture, appliances, and equipment.
Deducting These Taxes
Deductions are another difference between taxes on personal and real property. Real property tax is typically tax-deductible. This is why your tax accountant or software will ask if you own a home and pay property tax when filing your taxes.
While real property is almost always deductible, deductions on personal property tax depend on the value of the asset in question. If the tax is based on the asset's age, size, or another factor, then it likely isn't deductible.
Remember that to claim either of these types of tax deductions; you will have to itemize your deductions. This is important as many taxpayers just use the standard deduction, which became more popular following the 2017 Tax Cuts and Jobs Act. Before that, property owners were able to deduct more if they itemized. But since annual caps were imposed by the Act as of 2018, few taxpayers currently itemize unless their taxes are more complex or larger.
Real property is what people usually think of as real estate. It includes land and all properties permanently fixed to it, such as buildings and the permanent parts of those buildings. Real property is not movable since it is permanent and attached. By contrast, personal property is movable and not permanent.
Almost every single jurisdiction requires you to pay real property taxes, which most people call real estate taxes. Requirements for personal property taxes are much rarer, and they usually only apply to businesses. There are certain taxes that are built into service fees, such as car registration fees.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.