Can Real Property Become Personal Property?

Property is categorized as either real or personal. Real property consists of land and anything permanently attached to it, such as buildings, while personal property includes all other movable items. However, an item of real property can be converted into personal property through specific actions and agreements. This process changes its legal status and how it is owned, sold, and taxed.

Understanding Fixtures

A fixture is an object once considered personal property that has been attached to real property, legally making it part of the land. To determine if an item is a fixture, courts apply three main tests.

The first test is the method of annexation. An object attached with bolts or cement is more likely to be a fixture than one that is simply plugged in. If removing the item would cause significant damage to the real estate, it is likely a fixture. For example, a built-in oven wired into the wall is annexed more permanently than a countertop microwave.

A second consideration is the adaptation of the item to the property’s use. This test looks at whether the object is uniquely suited to the real estate. Custom-built bookshelves designed for a specific alcove or a specialized furnace for a home’s heating system are examples. Their utility is intrinsically linked to that particular home, suggesting they are part of the real estate.

The final and often most important test is the intention of the party who installed the item. Courts examine the circumstances to determine if the installer intended the object to become a permanent part of the property. For instance, installing an integrated sound system throughout a home implies the intent was to benefit the house permanently. This intent is often more significant than the physical attachment or specific use.

The Process of Severance

The conversion of real property back into personal property is accomplished through severance. This is the act of separating an item from the land, which can happen through a physical action or a legal agreement, changing its legal classification.

Actual severance involves the physical detachment of an item from the land or a building. When a tree is cut down, it is severed from the land and becomes personal property. Similarly, if a homeowner removes a built-in cabinet from the wall before a sale, they have actually severed it, converting it back into personal property.

Constructive severance occurs through a legal agreement rather than physical action. An item attached to the property is legally separated by the terms of a contract before it is moved. For example, a farmer can sell crops still growing in the field; the sales contract constructively severs the crops, treating them as goods separate from the land.

In residential real estate, a seller and buyer can agree in the purchase contract that a specific fixture, like a chandelier or hot tub, will be excluded from the sale. This contractual clause severs the item, confirming its status as the seller’s personal property to be removed before closing.

Documenting the Property Conversion

Clear documentation is required to formalize the conversion from real to personal property. The purchase agreement must explicitly identify any fixtures the seller intends to sever and retain. The contract should list specific items, such as “the dining room chandelier,” and state they are excluded from the sale and will be removed by the seller before closing.

If a legally severed item is sold separately, a Bill of Sale is used to transfer ownership. A proper Bill of Sale should include the names of the buyer and seller, a description of the item, the sale price, and the date of the transaction. This creates a record of ownership transfer separate from the deed that transfers the real property.

The valuation of the severed item is important for tax purposes, and the price on the Bill of Sale should reflect a reasonable market value. The sale of severed goods can be a taxable event, with the seller potentially responsible for sales tax. The Uniform Commercial Code (UCC) treats contracts for the sale of minerals, timber, or structures to be removed by the seller as a contract for the sale of goods.

Lease agreements also define property status, particularly with “trade fixtures.” These are items a tenant installs in a commercial space, such as shelving or machinery. The lease can specify that the tenant has the right to remove these fixtures at the end of the lease term, pre-defining them as the tenant’s personal property, provided they can be removed without substantial damage.