Nonresidents pay taxes on property

Dear Teri,

With the upcoming referendum on whether to repeal property taxes in North Dakota, I have read a number of claims regarding equitability of property taxes versus other taxes. One aspect that I have not seen addressed is the portion of property taxes paid by nonresidents, especially of rural property.

It seems that many non-residents (and some residents) are purchasing property in North Dakota that was formerly used for agricultural production and converting it to recreational purposes (e.g., hunting), large rural estates or as capital investments.

Those lands have been taken out of primary production, so there is little or no income that could be taxed, thus seemingly placing a larger tax burden on residents if property taxes are repealed. How much do nonresidents pay in taxes on rural property in North Dakota?

On a related note, I understand that many landowners do not own the mineral rights for their property, and that a lot of the mineral rights are owned by nonresidents. It seems like the surface rights and the mineral rights together make up the total property value. If there are separate owners for surface rights and mineral rights, are they each taxed separately?

Jim Walla

Fargo

Thanks for writing! I contacted Tax Commissioner Cory Fong. Here’s what he said:

“The measure to repeal property tax has certainly generated a lot of discussion, and I appreciate the opportunity to respond to the questions posed by your readers.

“This particular writer is questioning the portion of property taxes paid by nonresidents. In particular, the writer seems concerned with out-of-state ownership of agricultural property and the impact that could have on the tax burden for our state’s residents.

“Agricultural land that is purchased for hunting or other ‘non-business’ purposes generally retains its agricultural classification for property tax purposes. If property taxes are repealed, the writer is correct in assuming possibly little or no income taxes would be imposed. Nonresident owners would be relieved of their primary tax obligation to this state and its subdivisions.

“In 2006, the North Dakota Association of Counties did an analysis of out-of-state ownership of real property in North Dakota. The results showed that 14 percent of agricultural acreage and 16 percent of agricultural property taxes related to property owned by nonresident owners.

“For tax year 2010, agricultural property was assessed a total of $164.7 million in property taxes. If the 2006 survey is at all representative of today’s nonresident ownership, one could assume — very roughly — that nonresidents may be responsible for $26.4 million in agricultural property taxes in this state.”

“Minerals in the ground are not subject to property taxes. When the minerals are produced, they are subject to the oil and gas gross production tax, which, in part, is in lieu of property taxes.

“This gross production tax is withheld from royalty payments to the mineral owners of all producing properties regardless if they are North Dakota residents or nonresidents. (Oil production is also subject to a second tax, the oil extraction tax. This tax is also withheld from royalty payments. It is not in lieu of property taxes, however.)

“A study conducted by NDSU (North Dakota State University) indicates about 55 percent of the minerals in the state’s oil-producing counties are owned by North Dakotans. The remaining 45 percent are owned by nonresidents.

“In all cases, the surface owner is responsible for property taxes on the land. Generally, the land continues to be taxed as agricultural property during the life of the well.

“Relative to the measure to repeal property taxes, if it is enacted, nonresident owners of surface property would be relieved of their tax obligations. Some of the burden may indeed be shifted onto resident property owners (or resident taxpayers in general) in the form of additional sales or income taxes. Nonresident owners of mineral interests — whether or not they are being produced — would likely not be affected by the measure.”

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