Question

Distinguish between real property, personal property and fixtures. What are the tests of fixture? Explain.

Answer 1

Definition of Property

Property is not only just a legal concept, and different disciplines express different philosophies about the purpose of property and the nature of property rights. Property can be defined as the “legal relationship between persons with respect to a thing.” The right of property is that sole dominance which one man claims and exercises over the external things of the world, in total exclusion of the right of any other individual in the universe. It consists in the free use, enjoyment, and disposal of all a person’s acquisition that is safeguarded only by the laws of the land.

We can own personal objects like iPods and DVDs, and even more complex objects like homes and minerals under the ground. Property also embraces objects whose worth is representative or symbolic: ownership of stock in a corporation is valued not for the piece of paper called a stock certificate but for dividends, the power to vote for directors, and the right to sell the stock on the open market. Wholly intangible things or objects like copyrights and patents and bank accounts are capable of being owned as property.
There remain many kinds of property that are not privately owned and some parts of the earth that are considered part of “the commons.” For example, large areas of the earth’s oceans are not “owned” by any one person or nation-state, and certain land areas (e.g., Yellowstone National Park) are not in private hands.

Property refers to anything that one can legally own. There are many types of properties but experts broadly categorize them as either real property or personal property.

Distinction among personal property, real property & fixtures

The most important distinction is between real and personal property. Essentially, real property is immovable, whereas, personal property is movable. At common law, personal property has been referred to as “chattels.” When chattels become affixed to real property in a certain manner, they are called fixtures and are treated as real property. (For example, a bathroom cabinet purchased at Home Depot and screwed into the bathroom wall may be converted to part of the real property when it is affixed.)

Real property: Land and buildings

Real property describes land and things that are attached to the land, which is why land is sometimes called real estate or realty. Even though wood, steel, and other building materials aren’t land themselves, when they’re built into structures attached to the land, they become real property, too.

Trees and other plants naturally growing on the land are also part of the real property. But plants that require regular human cultivation and labor, such as grains and vegetables, sometimes aren’t treated as part of the real property.

Therefore, when someone remarks real property, that means land, a home, building, as well as mineral interests. All the materials used to construct any structure that is attached to a piece of land are also considered real property like mentioned above. Hence, the critical thing to remember is that real property is land and anything else attached to that land. Real property is referred to like real estate and is also fixed property – meaning it cannot be moved. For instance, farm structures in a farm are real property because they are attached to the land.

Personal property

Personal Property is all property that isn’t real property. Personal property, unlike real property, is not fixed or associated with land. Personal property, therefore, includes belongings of any kind, as long as they are movable and are owned by someone. Personal property is usually viewed as assets and can be used in defining the net worth of a person. Personal property is a big category. It can be further divided into two subgroups: chattels and intangibles.

Personal property: Chattels

The term chattel sometimes refers to all kinds of personal property, but often it refers only to tangible personal property (such as nose flutes and toenail clippers) as opposed to intangible property.

In a business setting, chattels or tangible personal property can include business equipment, office furniture, business vehicles, business goods and more.
Another example of chattels, let us say that a person buys lumber and other building supplies including a hammer, saw, and some nails. These materials are personal property. They are chattels since they are tangible and are moveable.

Let us suppose a person uses these tangible items to construct a shed on his land. Can we say that the shed personal property? No. The shed is real property. Because it is attached to and is now part this person’s land. Well, what about the building materials saw, hammer and leftover nails? Those are tangible personal property and are chattels – they are movable, unlike the shed.

A chattel, such as a furnace, can be affixed to land and become part of the real property. Such chattels are called fixtures.

However, fixtures may retain their quality as separate personal property for certain purposes. For example, at the end of a lease term, the tenant generally has the right to remove fixtures she installed even though she doesn’t have any more right to the real property when the lease ends.

Personal property: Intangibles

Intangibles are all kinds of personal property that aren’t tangible, that can’t be seen or touched. So it can be said that this kind of property doesn’t involve a “thing” at all; it involves only a legal right. The mere existence of such a category of property is a reminder that, in the law, property most accurately refers to legal rights, not to things.

A person can own all sorts of intangible “things,” including the following:

• Bank accounts

• Franchises and licenses

• Insurance policies

• Intellectual property such as patents, copyrights, and trademarks

• Stocks, bonds, promissory notes, and similar documents that aren’t themselves valuable but merely represent intangible rights; currency is sometimes treated as an intangible.

Importance of the Distinction between Real and Personal Property

Each type of property is treated differently as far as the law is concerned. For instance, there are many different laws that specifically apply to personal property while others relate specifically to real estate. Knowing and understanding the types of properties can help us to decide which rules apply to what property and which policies and procedures are accessible for property rights violations.

In the legal system, the distinction between real and personal property is significant in several ways. For example, the sale of personal property, but not real property, is governed by Article 2 of the Uniform Commercial Code (UCC). Real estate transactions, by contrast, are governed by the general law of contracts.
Section 2-304 of the UCC says that the transfer of the goods and the seller’s obligations with reference to them are subject to Article 2, but not the transfer of the interests in realty nor the transferor’s obligations in connection with them.

The form of transfer depends on whether the property is real or personal. Real property is normally transferred by a deed, which must meet formal requirements dictated by state law. By contrast, transfer of personal property often can take place without any documents at all.

Another difference can be found in the law that governs the transfer of property on death. A person’s heirs depend on the law of the state for distribution of his property if he dies intestate—that is, without a will. Who the heirs are and what their share of the property will be may depend on whether the property is real or personal.

Tax laws also differ in their approach to real and personal property. In particular, the rules of valuation, depreciation, and enforcement depend on the character of the property. Thus real property depreciates more slowly than personal property, and real property owners generally have a longer time than personal property owners to make good unpaid taxes before the state seizes the property.

Here are the major differences between personal and real property :-

• Real property is immovable and is permanently attached to the land including a house, walls, blinds, windows, fixtures, doors, and more. On the other hand, personal property can be moved or taken from a home or business including furniture, artwork, light fixtures and more. It is not affixed in any way.
• Real property is mostly tangible while personal property is both tangible and intangible
• Real property is long lasting and durable while personal property is not necessarily durable
• Personal property is easy to understand – If a piece of property is not real property, then it is personal property.
• In legal considerations, both real and personal property follow different legal procedures.
• Real property cannot be hidden, but personal property can be hidden.

Companies that can accurately distinguish between real property and personal property may be able to minimize their property tax liability.

The distinction between real and personal property can apply in a variety of different contexts. Certain issues may arise when a creditor would like to take possession of a piece of equipment that may be integrated into the real estate or possible disputes regarding which items a seller can remove when they vacate a property. In the property tax context, the issue relates to the taxation of property as either real or as personal property.

While U.S. states have historically taxed all tangible property, many of its states hoping to attract new investment and retain existing manufacturing, have eliminated or are phasing out tax on personal property. Thus, the ability to properly categorize property as ‘real’ or ‘personal’ often can reduce the overall tax burden.

Recategorization of certain assets can have other tax benefits too—filers can generally depreciate short-lived personal property more quickly than long-lived real estate assets. In some cases, the categorization process can reveal instances where property has inadvertently omitted from taxation, or even may be, taxed twice by the local jurisdiction.

Fixtures

When it comes to classifying property as real or personal, most of the time the correct classification is readily apparent; however, a gray area lies within the determination of what constitutes a fixture.

Fixtures are defined as articles that were once personal property but have been installed or attached to the land or building in a somewhat permanent manner. They are legally regarded as part of the real estate and, thus, deemed real property.

For example, a stove bolted to the floor of a kitchen and connected to the gas lines is usually considered a fixture, either in a contract for sale, or for testamentary transfer (by will). For tax purposes, fixtures are treated as real property.

No clear line can be drawn between what is and what is not a fixture.

In determining whether an item should be classified as a fixture for tax purposes, most taxing jurisdictions typically apply a three-part test which was born out of Teaff v. Hewitt, 1 Ohio St. (1853), a mid-Nineteenth Century legal case which serves as the basis for the “common law” determination of fixtures associated with real estate.

The 3 tests are :-

Annexation

The object must be annexed or affixed to the real property. A door on a house is affixed. Suppose the door is broken and the owner has purchased a new door made to fit, but the house is sold before the new door is installed. Most courts would consider that new door a fixture under a rule of constructive annexation. Sometimes courts have said that an item is a fixture if its removal would damage the real property, but this test is not always followed. Must the object be attached with nails, screws, glue, bolts, or some other physical device? In one case, the court held that a four-ton statue was sufficiently affixed merely by its weight.

Adaptation

Another test is whether the object is adapted to the use or enjoyment of the real property. Examples are home furnaces, power equipment in a mill, and computer systems in bank buildings.

Intention

Recent decisions suggest that the controlling test is whether the person who actually annexes the object intends by so doing to make it a permanent part of the real estate. The intention is usually deduced from the circumstances, not from what a person might later say her intention was. If an owner installs a heating system in her house, the law will presume she intended it as a fixture because the installation was intended to benefit the house; she would not be allowed to remove the heating system when she sold the house by claiming that she had not intended to make it a fixture.

Because fixtures have a hybrid nature (once personal property, subsequently real property), they generate a large number of disputes.
No bright-line rule exists to define what constitutes a fixture. The aforementioned three-part test derived from Teaff v. Hewitt is foundational for determining whether certain property is or is not a fixture.
However, in the subsequent years since the case was decided, states, localities, and the courts have created complex—and in some cases contradictory—statutes, ordinances, and precedents for which the correct classification of property can be debatable. Taxpayers face significant taxation issues due to the ambiguity of the determination of fixtures and irregular application of common law tests in various contexts.

Example of disputes regarding fixtures:

Transfer of Real Estate

When a homeowner sells her house, the problem frequently crops up as to whether certain items in the home have been sold or may be removed by the seller. Is a refrigerator, which simply plugs into the wall, a fixture or an item of personal property? If a dispute arises, the courts will apply the three tests—annexation, adaptation, and intention. Of course, the simplest way of avoiding the dispute is to incorporate specific reference to questionable items in the contract for sale, indicating whether the buyer or the seller is to keep them.

Tenant’s Fixtures

Tenants frequently install fixtures in the buildings they rent or the property they occupy. A company may install tens of thousands of dollars worth of equipment; a tenant in an apartment may bolt a bookshelf into the wall or install shades over a window. Who owns the fixtures when the tenant’s lease expires? The older rule was that any fixture, determined by the usual tests, must remain with the landlord. Today, however, certain types of fixtures—known as tenant’s fixtures—stay with the tenant. These fall into three categories: (1) trade fixtures—articles placed on the premises to enable the tenant to carry on his or her trade or business in the rented premises; (2) agricultural fixtures—devices installed to carry on farming activities e.g., milling plants; (3) domestic fixtures—items that make a tenant’s personal life more comfortable (carpeting, screens, doors, washing machines, bookshelves, and the like).

The three types of tenant’s fixtures remain personal property and may be removed by the tenant if the following three conditions are met: (1) They must be installed for the requisite purposes of carrying on the trade or business or the farming or agricultural pursuits or for making the home more comfortable, (2) they must be removable without causing substantial damage to the landlord’s property, and (3) they must be removed before the tenant turns over possession of the premises to the landlord. However, any debatable points can be resolved in advance by specifying them in the written lease.