Is a tenant's leasehold improvement taxed as Kansas real property or personal property?

Plain-English summary

Kansas PVD Directive 92-011 says a leasehold improvement is not automatically personal property merely because a tenant installed it on leased land. The county appraiser must apply the law of fixtures to decide whether the improvement has become part of the real estate.

The directive uses three factors:

1. Annexation: how the item is attached to the realty.
2. Adaptation: how the item relates to the use or purpose of the realty where it is installed.
3. Intent: whether the person installing it intended a permanent annexation to the freehold.

The directive calls intent the controlling factor. Intent is inferred from the item's nature, the relationship and situation of the person installing it, the structure and method of attachment, and the purpose of the installation.

Removal damage and cost matter

An improvement looks more like a fixture when removing it changes the real estate's market value or requires significant time or cost to restore either the real estate or the improvement to its former use. Easy removal with minimal damage points toward personal property.

Fit with the real estate's use matters

An improvement may be adapted to the realty when it is a necessary or useful adjunct and makes the realty more valuable. If it was attached for a purpose that does not enhance the land's value, the directive says it generally is not treated as part of the land.

The final roll follows the classification

Once the appraiser completes the fixture analysis, the improvement goes on either the real-property roll or the personal-property roll. The directive noted that the former general statute for listing improvements on leased land as personal property, K.S.A. 79-328, had been repealed in 1981. It separately identified certain mobile homes under K.S.A. 79-340 and oil-and-gas property under K.S.A. 79-329 as statutory personal-property listing rules.

What this means for you

Commercial tenants

Before installing specialized equipment or build-outs, document how the item is attached and whether it can be removed without substantial damage or restoration cost. Those facts bear on the directive's fixture analysis.

Landlords

An improvement that becomes integral to the realty's use and value may be treated as real property. Apply the directive's three-factor test rather than classifying it solely from the fact that it is a leasehold improvement.

County appraisers

Do not classify all tenant improvements in one category. Evaluate annexation, adaptation, and intent, then carry the item on the roll matching the result.

Accountants and tax professionals

Keep the property classification question separate from accounting ownership or lease treatment. This directive applies a property-law fixture test for the tax roll.

Common questions

Q: What is the most important fixture factor?
A: Intent to make the item a permanent annexation to the realty, inferred from the surrounding facts.

Q: Does bolting or attaching an item automatically make it real property?
A: No. Annexation is one factor; adaptation and intent also matter.

Q: What does easy removal suggest?
A: If removal is easily accomplished with minimal damage, the directive treats that as an indication of personal property.

Q: What does costly or damaging removal suggest?
A: It points toward a fixture and therefore real property.

Q: Does making the building more valuable matter?
A: Yes. A necessary or useful improvement that enhances the realty's value may be adapted to its use or purpose.

Q: Where is the item listed after classification?
A: Fixtures are carried on the real-property roll; items remaining personal property are carried on the personal-property roll.

Q: What is the directive's formal date?
A: The Approved line is blank. Its second-page header displays 11-30-1992.

Citations and references

• K.S.A. 79-102 — definitions of real and personal property.
• K.S.A. 79-328, repealed by L. 1981, ch. 371, § 1 — former rule for improvements on leased land.
• K.S.A. 79-340 — certain mobile homes identified by the directive for personal-property listing.
• K.S.A. 79-329 — oil and gas property identified by the directive for personal-property listing.
• L. 1992, ch. 249, § 1 — authority cited for adopting the directive.
• Dodge City Water & Light Co. v. Alfalfa Land & Irr. Co., 64 Kan. 247, 67 P. 462 (1902).
• Stem Brothers, Inc. v. Alexandria Township, 6 N.J. Tax 537 (1984).
• Atchison, T. & S.F. R. Co. v. Morgan, 42 Kan. 23, 21 P. 809, 4 L.R.A. 284, 16 Am. St. Rep. 471 (1889).
• Eaves v. Estes, 10 Kan. 314, 15 Am. Rep. 345 (1872).

Source-citation note: The official PDF prints Atchison, T. & S.F. R. Co. v. Morgan with 42 Kan. 23 and 21 P. 809. The Kansas reporter citation resolves to the case, but the 21 P. 809 parallel citation did not resolve in the citation database checked during OCR review. It is preserved as published rather than altered.

Source

• Landing page: Kansas Property Tax Directives
• Original PDF: PVD Directive 92-011

Original ruling text

STATE OF KANSAS

David C. Cunningham, Director
Robert B. Docking State Office Building (913) 296-2365
915 S.W. Harrison St. FAX (913) 296-2320
Topeka, Kansas 66612-1585

                                         Department of Revenue
                                      Division of Property Valuation



                                         DIRECTIVE #92-011

    TO:              County Appraisers

    SUBJECT: Leasehold Improvements


    This directive is adopted pursuant to the provisions of L. 1992, ch. 249, § 1, and
    shall be in force and effect from and after the Director's approval date.

    County appraisers shall follow the law of fixtures in determining whether
    leasehold improvements constitute real or personal property for taxation purposes.

    K.S.A. 79-102 provides in relevant part:

                    … the terms "real property," "real estate," and "land" … shall include
                    not only the land itself, but all buildings, fixtures, improvements,
                    mines, minerals, quarries, mineral springs and wells, rights and
                    privileges appertaining thereto. (Emphasis added).

                     The term "personal property" shall include every tangible thing which
                    is the subject of ownership, not forming part and parcel of real
                    property … (Emphasis added).

    To determine whether an item constitutes a fixture, three factors are considered:
    (1) annexation to the realty; (2) adaptation to the use or purpose of that part of
    the realty to which it is connected; and (3) the intention of the party making the
    annexation to make the item a permanent annexation to the freehold [Dodge City
    Water & Light Co. v Alfalfa Land & Irr. Co., 64 Kan. 247, 67 P. 462 (1902)].


    In considering annexation when determining whether an item is a fixture, some
    courts have looked at whether removal of the item shall injure the realty or shall
    injure the item itself [Stem Brothers, Inc. v Alexandria Township, 6 N.J. Tax 537

Page 2

DIRECTIVE #92-011 11-30-1992
(1984)]. For example, an indication that the leasehold improvement is a fixture,
thus real property, is if removal of the leasehold improvement from the realty
causes a change in the market value of the realty or requires a significant amount
of time or cost to restore the realty or leasehold improvement to its original use.
An indication that the leasehold improvement is personal property is if removal of
the leasehold improvement from the realty is easily accomplished with minimal
damage to the realty or leasehold improvement.

Adaptation to the use or purpose of that part of the realty to which the item is
connected focuses on the relationship between the item and the use which is made
of the realty to which the item has been attached. If the leasehold improvement is
a necessary or useful adjunct to the realty and makes the realty more valuable,
then it may be said to have been adapted to the use or purpose of the realty to
which is was attached. If the leasehold improvement is attached for a use or
purpose which does not enhance the value of the land, it is generally deemed not to
become a part of the land [Atchison, T. & S.F. R. Co. v. Morgan, 42 Kan. 23, 21 P.
809, 4 L.R.A. 284, 16 Am.St.Rep. 471 (1889)].

The intention to make the item a permanent annexation to the freehold is the
controlling factor in determining the character of the item. Intention is inferred
from the nature of the item affixed, the relation and situation of the party making
the annexation, the structure and mode of annexation, and the purpose for which
the annexation has been made [Eaves v. Estes, 10 Kan. 314, 15 Am.Rep. 345
(1872)].

While no current statute requires improvements on leased land to be listed for the
purpose of valuation as personal property (K.S.A. 79-328; Repealed, L. 1981, ch.
371, § 1; April 25, 1981), statutory exemptions exist specifically requiring certain
mobile homes (K.S.A. 79-340) and oil and gas property (K.S.A. 79-329) to be listed
as personal property for the purpose of valuation.

The law of fixtures applies in determining whether leasehold improvements
constitute real or personal property. Once such a determination has been made,
the property shall be carried on either the real property roll or the personal
property roll.

Approved:
(Date) David C. Cunningham
Director of Property Valuation