Types of Property for Tax Purposes

There are two basic categories of property: real and personal. The property assessment procedures and the property tax rate will vary between these two categories. While income tax is based on the amount of money a taxpayer brings in, property taxes are based on assessed value of the property. This is known as an ad valorem tax. Ad valorem means the amount of tax on property is usually a percentage of its fair market value.

For example, when you buy personal property at a store, the sales tax is based on a fraction of how much you pay for that item. In much the same homeowners pay real estate tax that local government or municipality tax assessors calculate. The calculation on a local property tax bill may be subject to qualifying property tax exemptions. In general, however, there will always be some degree of tax liability to cover municipal expenses for things like police, firefighters, and school districts.

Real estate property tax assessments are conducted every tax year and may be paid in installments. Personal property taxes may be assessed quarterly or yearly. For example, property owners of business machinery may be required to pay different taxes on their equipment. If you are delinquent on tax collections, your property may become encumbered by tax liens. After a certain period, the government may be able to force your property into seizure or foreclosure.

When you file your annual income tax return, you can claim tax credits and tax deductions based on local property tax payments you may have already made. There may also be other types of deductions, such as property depreciation, that can reduce your yearly income tax liability with the Internal Revenue Service (IRS).

Differences Between Personal and Real Property

Real property, in general, is land and anything permanently affixed to land (e.g. wells or buildings). Typical examples of real property include immovable structures such as:

• Single-family homes
• Apartments, townhomes, cooperatives, and condominiums
• Offices and commercial buildings
• Underlying land or even barren land

On the other hand, personal property is any property that is not real property. Personal property is not permanently attached to land. In most cases, it is moveable and does not last as long as real property. Personal property includes:

• Vehicles, vessels, manufactured (mobile) homes, and recreational vehicles (RVs)
• Farm equipment, tractors, and machinery
• Jewelry, art, and paintings
• Household goods, TVs, appliances, and other tangibles
• Intangibles like bank accounts, stocks, and bonds

Types of Personal Property

Personal property is divided into tangible and intangible forms. Tangible personal property is just that: it has a physical form. It can be seen, touched, and moved. Examples of tangible personal property include:

• Clothing
• Books
• Computers

On the other hand, the notion of intangible personal property is an abstraction. Intangibles do not usually have physical forms, other than certificates or accompanying records. These include assets such as patents, trademarks, stocks, and bonds. Both tangible and intangible property may be subject to capital gains taxes. These are taxes you must pay when you sell property for more than you purchased it.

Classes of Property

Property is also grouped into various classes and subclasses for purposes of tax assessment. These classes may be based on the property's use. Schedules of classes vary from state to state. For example, a state may have the following classes of property:

• Class 1: Agriculture, grazing, livestock, notes, bonds, stocks, accounts receivable
• Class 2: Commercial properties
• Class 3: Motor vehicles
• Class 4: Personal property, except motor vehicles
• Class 5: Residential, farm homes
• Class 6: Swamp and waste

Property use classification may serve as a basis for adjusting the personal property or real estate tax rate.

Types of Property for Tax Purposes: Additional Resources

If you still have questions after reading this article, you may wish to do additional research about the law. Click on the links below to learn more.

• Impact of Changing Property Values on Property Taxes
• Tips for Challenging Valuation of Property
• Payment of Property Taxes

Get Professional Legal Help With Your Property Tax-Related Issues

It pays to fully understand what your tax obligations will be before buying property. Real estate taxes in particular may comprise a sizeable portion of your home-related expenses. In the same manner, personal property taxes can become a large part of overhead in a commercial enterprise. A local real estate attorney or tax lawyer will be able to help you make sense of it all.