Keeping It Real, And Personal – Property, That Is

We discuss property in great deal in our blog posts. We talk about property that can be exchanged for other property, that can be held for investment, or that can be bought or sold.

But what, exactly, is “property?”

Black’s Law Dictionary defines property as “The ownership of a thing is the right of one or more persons to possess and use it to the exclusion of others.” In plain English, property is something you own. The doo-dads on your desk are your property. The clothes on your back, the toenail clippers you use, the stuff you might buy from Amazon – all property.

Though the property definition is fairly straightforward, it consists of many categories, with the two main ones being personal property and real property. Each property category has different rules and regulations when it comes to acquisition, ownership and disposition.

The Reality of Real Property

Returning to Black’s Law, real property is  “applied to land and immovable property on land, such as buildings.” So, real estate. Plants and trees growing on that land are also real property.

However, things become tricky with those plants and trees. Let’s say you cultivate a garden plot in the backyard of your vacation home; you like growing tomatoes and cucumbers. Those vines, with their fruits and vegetables, are defined as real property – at least, until you begin your harvest. Once those tomatoes and cucumbers are in your bowl or basket, they become personal property, though the vines remain real property.

The ownership situation becomes more interesting if you sell fruits and vegetables to your neighbor. Once you and your neighbor agree to a contract, the tomatoes and cucumbers becomes the neighbor’s personal property – even if you haven’t yet harvested them. Meanwhile, the vines remain real property.

On the Personal Side

Aside from vegetables, personal property is defined as “the belongings of an individual, excluding any real estate property or other buildings,” according to Black’s Law. This is a large category, so the law obligingly provides subcategories, consisting of tangible (or “chattel”) and intangibles.

Chattel – See It, Touch It

Chattel, which traces its lineage to the middle ages during which “cattle” was considered valuable property, is “personal property . . . not amounting to a freehold or fee in land,” to quote Black’s. Your desk doo-dads are chattel, as are the tomatoes you pick for your own consumption. Everything that isn’t tied to the land, or which is severed from the land, is personal property.

That is, until it isn’t. Chattel has subcategories: chattel real, and chattel personal. Chattel real is “an interest in land that isn’t a freehold, but a leasehold.” Back to plain English, chattel real is a lease, a land or a building you hold for a limited amount of time. An apartment building is real property. Residents control their units through chattel real laws that expire when the lease ends.

Finally, there is chattel mortgage. In the United States, this term is better known as a secured transaction or even a secured loan. Black’s defines a chattel mortgage as personal property that is transferred “as security for a debt or obligation.” If the borrower fails to meet the contract terms, lender has the right to take ownership of the personal property.

Ads on TV that promise viewers cash for their car titles is a good example of a chattel mortgage. The lender will offer the borrower a loan based on a percentage of the car’s value, and will hold onto the car’s title, as collateral, until the loan is repaid.

Intangibles – Legal Right of Ownership

The final category is intangible personal property, which can include bank accounts, licenses, intellectual property (copyrights, trademarks and patents), stocks, bonds and insurance policies. Intangibles can’t be seen or touched, and ownership implies a legal right, rather than physical possession. If you have a copyright on a book you’ve written, you don’t own the book itself outright. What you own is the legal right to do anything you want with the book, such as sell it electronically or get it printed.

There are certain intangibles that can’t be owned. Light can’t be owned, nor can the high seas, as these are considered communal, or belonging to everyone. “Air” is also communal – except when it comes to “air rights.” With air rights, we need to return to real property. Air rights give you the ability to control, occupy or use the vertical space above your real estate. You can transfer, lease or sell the rights to others (though when you build within your “air property” there are other rules to which you need to adhere).

Can we help you?

If you’re reading this blog on the Realized 1031 website, you may be wondering how all this applies to your 1031 exchange.  As we covered in a recent blog, the recent Tax Cuts and Jobs Act eliminated like-kind exchanges for personal property. Fortunately, the like-kind exchange option still applies to real property (provided such property is held for business or investment purposes).

While property ownership could be considered fairly straightforward, there are many legal rules when it comes to possession. Certainly, you can give your dishes and silverware to your son or daughter, to help them with their first apartment, with no legal hassles. However, when it comes to the sale or transfer of property of worth, whether real or personal, it’s best to consult a trained professional.