Personal Property vs. Real Property

Why rules from an old credit still apply

These definitions were written for the former investment tax credit. In Hospital Corporation of America v. Commissioner (1997), the Tax Court held that the same tests still decide whether an item is §1245 or §1250 property under MACRS. The IRS acquiesced in that legal test, though not in every item-level result.

Action on Decision 1999-008 records that acquiescence. It accepts the legal framework and leaves room to dispute particular items on their facts. Citing HCA for the test is different from treating every hospital fixture in that opinion as 5-year property in another building.

Rev. Proc. 87-56 class 00.3 also points back to §1.48-1(e) when it excludes buildings and structural components from land improvements. The old regulation is the classification vocabulary MACRS still uses.

The permanence test

Whiteco Industries v. Commissioner (1975) asked six questions: can the item be moved and has it been; is it designed to stay in place; how long is it expected to stay; how hard is it to remove; how much damage does removal cause; and how is it attached. No single factor controls.

An item that is bolted down is not automatically a structural component. An item that can be lifted is not automatically personal property. The factors are weighed together against the regulation’s list and the item’s function.

AmeriSouth XXXII, Ltd. v. Commissioner later applied related tests to an apartment complex and kept most contested items with the 27.5-year buildings. That result is fact-specific to those apartments. It is not a rule that residential finishes can never be personal property.

Function matters too

Items that serve equipment or the business, rather than the building, can be personal property. Electrical wiring and plumbing dedicated to specific equipment are common examples, while general building wiring and restroom plumbing stay with the building. Courts have often decided these questions item by item.

Scott Paper and later electrical cases discuss allocating primary and secondary electrical distribution by design load. The IRS audit guide treats that functional allocation as accepted for electrical distribution. It does not extend the same method to plumbing or HVAC as an IRS-accepted approach.

Lighting follows a similar function question: is the fixture the room’s primary light source, or is it decorative or merchandise lighting? Primary building lighting stays with the structure in the regulation’s list. Decorative or process lighting is analyzed on the facts.

What the regulation’s lists do not settle

The examples in §1.48-1 are illustrations, not an inventory of every store or apartment. Grocery counters and display racks are personal property in the regulation. Kitchen cabinets in a residential rental are treated as building in the IRS residential matrix. Those are different facts, not a contradiction in the definition.

Industry matrices in Publication 5653 show how examiners have applied the tests in a few businesses. Each matrix warns that it reflects that industry’s general pattern and may not apply elsewhere. Copying a restaurant row into an office is a common error.

Why the line matters on sale

Depreciation on §1245 property is generally recaptured as ordinary income to the extent of depreciation previously taken. Section 1250 recapture is generally limited to additional depreciation above straight line.

A study that moves cost into §1245 classes therefore changes both the timing of deductions and the character of gain if the property is sold. That trade-off belongs in the conversation with your CPA before the return is filed.