Personal property refers to items that are movable and not permanently attached to real estate (real property). It is sometimes called “personalty” and encompasses a broad range of tangible and intangible assets.
Types of Personal Property
Personal property is categorized primarily into two types:
Tangible Personal Property
Items with a physical form such as furniture, vehicles, machinery, and inventory.
Intangible Personal Property
Items that do not have a physical presence but hold value, including stocks, bonds, patents, and copyrights.
Tax Implications
Gains and losses from the sale of personal property used in a trade or business have specific tax treatments:
Section 1231
- Gains: Generally taxed as capital gains, providing preferable tax rates.
- Losses: Treated as ordinary losses, allowing for more beneficial deductions against ordinary income.
Depreciation Recapture
Any gain attributable to depreciation deductions previously claimed is recaptured and taxed as ordinary income.
Investment Tax Credit (ITC) and Section 179 Deductions
Investment Tax Credit
Certain personal property may qualify for the Investment Tax Credit, allowing a percentage of the property’s cost to be credited against taxes.
Section 179 Deduction
Businesses can elect to deduct the full purchase price of qualifying personal property in the year it is placed in service, rather than capitalizing and depreciating the asset over time.
Examples and Applications
Example: Business Equipment
A company purchases machinery for $100,000 and claims $20,000 in depreciation over the years. If sold for $90,000:
- $20,000 (recaptured depreciation) will be taxed as ordinary income.
- The remaining $10,000 gain will be taxed as a capital gain under Section 1231.
Example: Intangible Personal Property
Shares of stock purchased as an investment are classified as personal property. Gains on sale are taxed under capital gains rules, potentially qualifying for long-term capital gains tax rates if held for more than a year.
Historical Context
Evolution in Tax Law
The classification and tax treatment of personal property have evolved alongside changes in tax laws to encourage investment in business assets and clarify the distinction between personal and real property.
Related Terms
- Real Property: Immovable property such as land and buildings.
- Depreciation Recapture: The portion of a gain on the sale of depreciated personal property that is taxed as ordinary income.
- Section 179: A tax code section allowing for immediate expensing of qualifying personal property up to specific limits.
- Additional First-Year Depreciation: An allowance permitting accelerated depreciation on qualifying property in the first year it is placed in service.
FAQs
What qualifies as personal property?
How is personal property taxed?
Can personal property qualify for tax credits?
References
- Internal Revenue Service (IRS) Publication 544, Sales and Other Dispositions of Assets.
- IRS Publication 946, How to Depreciate Property.
Summary
Personal property is a fundamental concept in law and finance, covering movable assets not attached to real estate. Its tax treatment under rules such as Section 1231 and special provisions like depreciation recapture and deductions under Section 179 and ITC can significantly impact financial outcomes. Understanding these intricacies ensures proper tax planning and asset management.
