Typically, real property is considered real estate—land, buildings, and other improvements, attached structures, anything growing on the property, and rights associated with a property (such as drilling rights). Permanent fixtures that can’t be removed without damage are also considered real property. Real property often contrasts with personal property, including machinery, artwork, collectibles, vehicles, and other personal belongings. Personal property includes valuables like jewelry and less costly items like clothing. It can also encompass intangibles like intellectual property.
Why Does the Definition of Real Property Matter?
The distinction between real property and personal property can determine whether something is taxed, how quickly it can be depreciated, and whether it is eligible for specific tax treatments. Thus, the definition potentially makes a difference to taxpayers and investors.
For example, before the passage of the Tax Cuts and Jobs Act in 2017, IRS Section 1031 was available for exchanges of some personal property in addition to real estate. However, the TCJA specifically disqualified the exchange of personal property that had previously been eligible, such as aircraft, heavy equipment, and some other business assets. So, some items that previously would have been eligible are not now.
As explained in the Journal of Accountancy in February 2021, machinery or equipment is not an inherently permanent structure unless it serves an inherently permanent structure and does not contribute to income production other than supporting occupancy. The Journal provides a valuable illustration comparing a gas line that fuels a furnace as an example of real property to a gas line fueling an oven, which would not be.
Can Personal Property Be Included in a 1031 Exchange?
Generally, personal property that is part of the real estate, usually transferred with the real estate, and is less than fifteen percent of the fair market value of the exchange can be included in the exchange. The fair market value of any included personal property should be subtracted from the amount of the property value that is used to determine the trade.
Vacant Land Is Another Real Property Example
Vacant land is real property with no buildings, structures, or other improvements. Yes, taxpayers can exchange vacant property in a 1031—if the land is held for investment, trade, or business. While the land doesn’t have to generate income to be held for investment, the owner's intent can't be to improve and sell the land, or it wouldn't be eligible for an exchange. The intention also can't be to build a personal residence because then the land is for personal use, not held as an investment.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Examples are hypothetical and for illustrative purposes only. Withdrawal strategies should take into account the investment objectives, financial situation and particular needs of the individual.
