what is the signifiance of the distinction between real and personal property?

Answer 1

The biggest is depreciation. Real property is land and buildings and silos and stuff like that. Personal property is everything else from cars to computers to machines to intangible property. Real property is depreciated over 27 1/2 years if it is residential and 39 years if it isn't. If subject to AMT, all real property is depreciated over 40 years. The maximum number of years personal property is depreciated over is 25. Personal property can sometimes take advantages of section 179 expensing and bonus depreciation whereas Real property can not. Personal property can be deprecated with an accelerated depreciation schedule whereas Real property must use straight line. Personal property is depreciated using half-year or mid-quarter whereas Real property always uses mid-month. Finally, when the property is disposed of, gain is treated differently. Personal property (section 1245) gain is taxed as ordinary income but real property (unrecaptured section 1250) is taxed at a maximum of 25%.

That is all I can think of. Hope it helps. I'm interested to see what others say.

Answer 2

I love TaxMan's answer, but just wanted to add that what is personal property for local law might not be for tax law.

If you are having significant property additions, it may well be worth it to hire someone (say a CPA firm) to do a cost segregation study to help identify those things that can be depreciated as personal property under the shorter (and more advantageous in the current) tax lives.

The big question usually is: when would you like to pay the tax, now or later? I can't find a client who would rather pay it now.