Personal Property vs Real Property
When does personal property become real property?
Sometimes in real estate we run into disputes related to the difference between personal property and real property. This is typically surfaced when the seller moves on, taking something the buyer feels should have been left behind and a conflict follows.
A fair amount of the distinction regarding the status of property is related to how the item in question is attached to the property (see how the rooster in the blog photo is attached to the building). There are also several additional important tests that come into play, but first what is a fixture?
Fixtures in real estate:
When we take personal property and attach it to the land so that it is permanent and immovable, it is known as a fixture. An example would be a set of can lights for your kitchen. Before installation they are personal property. After they are installed in the ceiling they are permanent and immovable, so they become real property.
Over the years states have developed laws to define fixtures. Therefore, one needs to be aware of the governing laws of the state that the property is located in. The status of a refrigerator in a home sale might be characterized as personal property in one state, but real property in another.
The five tests:
Whether an item is a fixture and part of the real property is not in the eyes of the beholder, since there are five commonly used tests in place to define property as real or personal.
1. Attachment method:
If an item is nailed, screwed or glued to the structure we would have some pretty conclusive evidence that it is real property. Items that are permanently attached to structural surfaces such as flooring, or bathtubs, would also draw this obvious conclusion. If it’s permanently affixed it is real property.
There is an exception to the attachment test described above - trade fixtures: Consider shelving in a retail store that is physically attached to the floor, so at first glance the shelving would appear to be real property. However, in a commercial lease termination the tenant may remove the shelving provided it is a necessary part of his/her business and the removal does not cause damage to the property.
Then, there are more squishy things: I have a small wall fountain in my lanai that plugs into an outside wall outlet. It is not permanently screwed to the wall, but it hangs from a screw that is. Test question: Does this method of attachment make it real or personal property? Answer: Don’t overthink - see contractual agreement method described below to address issues like this.
2. Contractual Agreement:
One way a thinking person can avoid disputes is to contractually agree on the status of an item from the very beginning. Let’s say great grandma’s heirloom crystal chandelier is hanging over your dining room table. As the seller, you naturally want to take it.
Without doing anything to prevent it, the chandelier would be considered real property and would transfer to the buyer at closing. This is because it is attached and immovable.
A way to avoid losing this heirloom at closing would be to identify it as an item to be excluded in the real property sale, while also agreeing as to when it will be removed. By mutually agreeing to the status of the item, unnecessary confusion and conflict can be easily avoided.
3. Adaptation:
You have triple garage doors, each with a motor. The motors are attached to brackets on the ceiling, so they are clearly real property. You also have garage door openers. Humm…can you take them when you leave at closing?
No. They are considered through adaptation to be a necessary part of the operating garage door system. The system will not fully function without them, so they must be surrendered to
the buyer at closing.
4. Relationship of the parties
This test revolves around the relationship of the parties and in real estate it is typically an arms-length contractual one between a buyer and seller, or a landlord and tenant. Usually when the relationship test is applied the buyer / tenant tend to prevail over the seller / landlord.
5. Intention:
When an item was originally attached, was it intended to be permanently left in place? I had neighbors that planted a sapling apple tree in their yard for each of their two children in the year that they were born.
Two years later dad was relocated for work and they had to move to another town. Even though the trees were small enough to dig up and replant, the parents originally intended them to remain in place. Result – the trees remained as real property and were transferred at closing.
How do I sell personal property with my real property?
Most times there is not a dispute between the parties about the nature of an item, real or personal, because it was clear from the beginning. When the buyer wants to buy some of the personal property and the seller agrees to sell it, how is this done? Through a Bill of Sale.
Since the personal items are not a part of the real property title transfer, a separate arrangement is made with a Bill of Sale. I have sometimes used a tie-in clause in the real property contract to avoid the problem of a buyer closing on a property and then the seller failing to close and convey the personal items. I do this by making the Bill of Sale transaction a condition precedent of closing on the real property. Doing this can avoid a nasty problem with the right of reentry that the Bill of Sale purchaser would lose if the real property sale had closed prior to the transfer of the personal property.
Review:
We’ve seen that there can be confusion regarding the status of an item and the tests that can be applied to determine it. Just remember that personal property can be converted to real property and vice versa. By taking thoughtful and deliberate action in advance, unnecessary conflict can be avoided. Take care in handling property status issues and don’t assume. Good luck!
