The Difference Between Real Property vs Real Estate

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Written By Justin McGill

DealBloom aims to share the latest tips and strategies to help realtors, brokers, loan officers, and investors navigate the world of real estate.

If you’re like most people, you probably use the terms “real property” and “real estate” interchangeably. But did you know that there’s a difference between real property vs real estate?

Real property refers to land and any permanent improvements attached to it, such as buildings or fences.

Real estate, on the other hand, is a broader term that can encompass both real property and personal property (such as furniture or cars). So when someone says they’re in the real estate business, they could be referring to either buying and selling land or renting out apartments.

Confused yet? Don’t worry – we’ll break down everything you need to know about real property vs real estate in this blog post. Keep reading to learn more!

Real Property vs Real Estate

For most people, the terms “real estate” and “real property” seem synonymous as they are often used to imply the same thing.

However, if you’re looking to get into professional property management or investing, it’s a good idea to understand the difference between real estate and real property.

There are many types of real estate, but the three main categories are residential, commercial, and industrial.

Real property, on the other hand, can be either land or improvements to land, such as buildings or fences.

Real estate is any physical property that includes land, buildings, and the air above it. This also includes the area beneath the land.

The word “real” in the term refers to the fact that an asset is something you can touch.

There are four main categories of real estate:

  • Residential
  • Commercial
  • Industrial
  • Land

Residential real estate includes houses, apartments, townhouses, condominiums, duplexes, co-ops, triple-deckers, quadplexes, vacation homes, etc.

Commercial real estate includes office buildings, retail stores, shopping malls, schools, hospitals, hotels, and mixed-use commercial buildings. Apartment complexes are also considered commercial property because they are used to generate income.

The industrial real estate market includes properties or buildings that are used for the manufacturing of products such as factories and warehouse spaces. This includes buildings used for storage, goods distribution, and research.

Distribution centers that handle goods can fall into the category of commercial buildings, but it depends on the way that the distribution is done, as well as the location and other relevant factors.

As the name implies, land means vacant lots, farms, ranches, and all other types of land that are reused, underdeveloped, and uninhabited.

When Does Personal Property Become Real Property?

Personal property can sometimes become real property and vice versa.

Let’s take a quick look at a farmer’s house to illustrate how personal property becomes real property.

Let’s say our farmer has just purchased and installed a bathtub in the master bathroom. The tub, which was formerly personal property, is now permanently attached to the house and becomes real property.

This process is called annexation where the personal property becomes real property. If the farmer decides to sell the house, the tub may not be removed before closing a sale as it is an improvement to the real property.

Now, let’s talk about the difference between a fixture and a trade fixture.

In commercial real estate, a trade fixture is any equipment that is used in business. For example, a bookcase that is fixed to the walls of a bookstore is considered a trade fixture. The bookstore owner can remove the bookcases and take them with her when she leaves the retail space.

If the business owner removes the bookcases after the lease is up, they will need to compensate the landlord for any damage caused to the retail space.

What about the farmers’ livestock, machinery, and crops? These are considered personal property.

Any property that is not considered real estate is personal property. Movable personal property is also called chattel.

All property that is not land or permanent fixtures on it is considered personal property.

Why The Distinction Matters

There are several reasons why classifying real property and personal property is important.

Sometimes, creditors want to obtain ownership of equipment or fixtures that are attached to real estate. This sometimes causes problems when the person who owns the property wants to remove it when they move.

This concerns how a property, whether real or personal, is assessed for taxes.

In the past, many states in the U.S. used to tax all tangible goods.

States are beginning to eliminate personal property taxes, which may increase investment and decrease the overall tax burden for citizens.

One way to reduce the overall taxes you pay is by reclassifying certain property as personal, which may result in more tax savings. For instance, you can often deduct the depreciation of shorter-lived business equipment much faster than the depreciation of longer-lasting buildings.

When an asset is classified incorrectly, it can have major implications for taxation. In some cases, this may mean that a piece of property was unintentionally overlooked for taxation, or worse, that it received double the amount of taxation. This is why it’s important to ensure that your assets are properly categorized.

How to Classify Property

Figuring out if a property is classified as real or personal property can sometimes be tricky.

A fixture is an item that was once personal but is now affixed to real estate. Fixtures are typically considered part of the property.

For taxation purposes, the classification of fixtures is usually determined by a three-part test.

  • Attachment: The authority will evaluate whether a property can be detached and if any damage will occur to the real estate.
  • Adaptation: The assessment considers how a property is being used relative to the real estate.
  • Intent: The jurisdictions evaluate if the installation on the property is intended to be permanent or does the use of the property change the intent.

There is no clear definition of what constitutes a ‘fixture’, however, this can lead to a lot of confusion. This can lead to many tax complications.

Are Real Estate and Land The Same?

No, real estate and land are not the same. Real estate is a term that refers to the physical property while the land is the actual ground that the property is built on.

Conclusion

In conclusion, it’s important to understand the difference between real property vs real estate. Real property refers to land and any permanent improvements attached to it, while real estate can encompass both real property and personal property. So when you’re in the market for buying or selling land, be sure to keep this distinction in mind!

Justin McGill