Real Property, Personal Property, and Why the Label Matters
The line between real and personal property decides how an asset is taxed, how title passes and which state's law reaches it. A New York co-op, a rental building in an LLC and a low-basis house deeded to a child all show why.
A reporter recently asked me to explain the difference between real property and personal property and why anyone outside a law school classroom should care. The answer is that the label helps determine how an asset is taxed, how title passes, and which state's law and courts reach it. Real property is land and what is permanently attached to it. Everything else, from a car to a brokerage account, is personal property.
Where the line falls
Attachment alone does not settle the line, so a buyer who wants the chandelier should say so in the purchase contract. At death, real property passes under the law of the state where it sits, while personal property generally passes under the law of the owner's domicile. That one rule is the reason a Florida resident with a cabin in North Carolina can end up with two probates.
The examples that surprise people
Homes, rental buildings and farmland are real property. Vehicles, jewelry, art, bank and brokerage accounts and business interests are personal property. Two cases surprise people.
A New York cooperative apartment is stock in the cooperative corporation plus a proprietary lease, so it is personal property for most state law purposes, even though a qualifying shareholder may deduct a share of the building's real estate taxes and mortgage interest, subject to the usual limits.1
A rental building placed in a limited liability company has two levels of ownership. The company owns real property. The owner holds a membership interest, which is personal property. That is why an LLC can avoid a second probate in the state where the building sits: at the owner's death, what passes is personal property governed by the law of her domicile, not land governed by the law of its location.
How each is taxed
For income tax, use and basis often matter more than the label. A loss on a personal-use car or a home sold below cost is not deductible, while a gain is taxable, subject to the home sale exclusion of up to $250,000, or $500,000 for qualifying joint filers.2 Business or investment real property can be exchanged for other such property with the gain deferred, and the federal definition of real property for that purpose can include qualifying cooperative stock even though state law treats it as personal property.3 Long-term gain on art and other collectibles is taxed at up to 28 percent, compared with 20 percent for stock, before the 3.8 percent net investment income tax and any state tax.4
How each is transferred
During life, real property passes by a signed deed delivered to the new owner. Recording the deed in the county land records protects against later claims but is not what makes the transfer valid. Personal property moves by delivery with intent to give, a bill of sale or assignment, a new certificate of title, or account re-registration.
The costly shortcut is deeding a low-basis house to a child to simplify the inheritance. The child generally takes the parent's basis, and a later sale can produce a large capital gain that an inheritance would have erased.5 If the parent keeps the right to live there, the house is generally pulled back into the parent's estate, which usually restores a stepped-up basis even when no estate tax is owed, but at the cost of the very simplicity the family was after.6
Estate planning
Probate and estate tax are separate problems. A funded revocable trust, a transfer on death deed where the state allows one, or an entity can keep an out-of-state house out of a second probate, but none of them by itself reduces estate tax, and property in another state can create separate estate tax exposure there.
The family home raises a practical problem rather than a mathematical one. Children who inherit it in equal shares can deadlock over use, expenses and whether to sell, so the documents should provide a buyout right or equalize with other assets or life insurance. For personal effects, many states let a will refer to a separate signed list that can be updated without re-signing the will.
What a good advisor does
The most useful thing an advisor does is build an inventory that answers three questions for each asset: who can act on it if the owner becomes incapacitated, who receives it at death, and whether there is enough cash to carry or divide it without a forced sale. That analysis counts the home and the collectibles in net worth without treating them as money that can be spent. The advisor then coordinates deeds, beneficiary forms, basis records and insurance with the estate attorney, the accountant and the insurance professional, because retitling is a legal act with tax consequences.
Notes
- Internal Revenue Code section 216. ↩
- Internal Revenue Code section 121. ↩
- Internal Revenue Code section 1031; Treas. Reg. section 1.1031(a)-3. ↩
- Internal Revenue Code sections 1(h)(4) and 1411. ↩
- Internal Revenue Code sections 1015 (basis of property acquired by gift) and 1014 (basis of property acquired from a decedent). ↩
- Internal Revenue Code section 2036. ↩
Terry L. (T. L.) Turnipseed, J.D., LL.M., CTFA, is a tax, trust and estate attorney in Fort Lauderdale, Florida, and Head of Estate and Tax Planning at Alta Trust Company. He is a former tenured professor of law at Syracuse University. Reach him at tl@turnipseed.law or on LinkedIn. This article is general information, not legal advice.