Legally, tangible property is any property, real or personal, that can be touched. Real property consists of land or real estate that cannot be moved or is attached to the property, such as buildings, oil, gas and minerals, and trees. Personal property is property that can be moved, such as machinery, equipment and furniture. Although oil, gas, minerals and trees are treated as real property, once extracted, mined or harvested, they become tangible personal property.
Tangible and Intangible Property
Not all property is tangible. For instance, intellectual property, ideas and good will, which is the value of a business over and above its assets, are all intangible property that can be owned, but lacks physical substance or existence. The Internal Revenue Service does not yet tax ideas or thoughts until the intangible property is conveyed, transferred or sold, at which point it becomes taxable. Once an idea is patented or copyrighted, such as with an invention or book, the idea becomes tangible and therefore can be monetized and the income generated from sales is taxed.
Real property, or real estate, is tangible property that is immovable. Things such as oil, gas, precious metals and standing timber are all part of the land. However, if standing timber is removed, it becomes tangible personal property. If you sell the timber, the sale is treated as a capital gain and not ordinary income. In addition, the taxation on the real property is based on the appraised value of the property and not on the assumed value of the timber or other natural resource on the property.
Tangible Personal Property
Tangible personal property is essentially any property that can be moved. Some states tax tangible personal property. For instance, a farmer in a state with personal property tax may pay taxes on his vehicle, farm tractor and cattle. Other states have a tax on business personal property such as equipment, vehicles and computers. The method of taxation is based on a percentage of the value of the property.
Business vs. Individual Real and Tangible Property
The primary difference between business property and individual property is the method of taxation and the state in which the property is located. So whether you are thinking of starting a business or planning to buy a new speedboat, check your state laws on taxation. You may be subject to a tax on your real and tangible personal property that you did not expect.