As technology advances, people increasingly interact with virtual objects in settings such as augmented reality (AR) where the virtual layer is superimposed on top of the physical world. Similarly to interactions with physical objects, users may assign virtual objects with value, experience a sense of relatedness, and develop psychological ownership over these objects. The objective of this study is to understand how AR’s unique characteristics influences the emergence of meaning and ownership perceptions amongst users. We conducted a study of users’ interactions with a virtual dog over a three-week period, comparing AR and fully virtual settings. Our findings show that engagement with the application is a key determinant of the relation users develop with virtual objects. However, the effect of the background layer–whether physical or virtual–dominates the development of relatedness and ownership feelings, highlighting the importance of the “real” physical layer in shaping users’ perceptions.