Tuesday, May 17, 2011

Golden Rule: Three Different Types of Property

Detail of Jackson Building - 1924

[This is an overhaul of an article originally written in February of 2009]

While there are variations for what constitutes real and tangible personal property, these are pretty good definitions in most states.

Real Property

Real property is generally property that has been:

1. permanently
2. affixed to other real property (like land and buildings) and
3. is integrated into the value or use of that real property.

Permanent usually means there are no plans or expectations to remove the item - it will last as long as the building or at least 10 to 20 years.

Affixed means that you'd cause significant damage if you removed the addition.  

"Integrated" means that the additional property extends the life or increases the value of the existing real property. In addition, it would be something that would be expected in the building or that facilitates the purpose of the building (like a roof).

One test that I've seen is: if the building were purchased, would the new owner retain the addition, or would they probably tear it out?  In other words, is the addition something that is fundamental to the purpose and value of the building?  For example, if someone buys a house, would they keep the old draperies?  Probably not.  They might keep the Venetian blinds, but the drapes?  Blech.  Out they go!

Effect on construction contractors

If a construction contractor permanently affixes TPP to real property, and it becomes integrated into that real property, she has converted that TPP into real property.  In most states, the contractor's sale wouldn't be taxable and she would pay tax on the TPP when purchased by her.

TPP - Tangible Personal Property

Tangible personal property is property that is perceptible to the human senses (tangible), and is not real property. See above.

A simpler way to describe at TPP that is not as accurate, but easier to grasp, is: tangible personal property can be moved without causing damage to the property or to any property it is attached to.

Note that sales of real property are not generally taxable, but that sales of tangible personal property are, by default,taxable.  There are lots of exceptions and variations.

Intangible Personal Property

And then there's a third type of property: intangible personal property.

The Sales Tax Guy

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different. Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.

Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo.

No comments: