In North Dakota, if three siblings, A, B and C, are tenants in common of a section of land, can A and B sell their “shares” to person C without tax penalty to person C? Or does the entire section have to be sold, then repurchased by person C? And in the second case, what tax liability would C incur?
Thanks for writing! I contacted Tax Commissioner Cory Fong. Here’s what he said:
“The questions you are posing do not simply impact North Dakota income tax. There is also a federal income tax component to be considered. Given the vagueness of the scenario, my suggestion to you is that a more fruitful discussion on this particular topic could be had with a real estate attorney and/or a tax professional.
“In North Dakota, in situations where property is owned by two or more persons – considered as tenants in common – each tenant owns an undivided share of the property. The shares do not have to be equal.
“If we assume that this is a very straightforward transaction, absent any restriction agreed upon by the tenants, each tenant may sell, exchange, give away or otherwise deal with his or her respective interest in the property (e.g., mortgage it) just like any other property interest.
“Given the above, A and B may sell their respective shares of the property to C. Any federal income tax implication, i.e., a gain or loss on the sale, will fall on A and B as the sellers.
“As the buyer, C would not incur any federal income tax consequence simply from purchasing the others’ interests in the property. (C would become the sole owner of the property and would have to deal with any federal income tax implications only at such time as C disposes of the property.)
“As to the last two questions regarding the sale of the entire section of land with the repurchase of it by C, that course shouldn’t be necessary if all three tenants are in agreement on the sale of A’s and B’s respective interests to C.
“There are legal recourses that tenants in common may have in cases where there is not complete agreement, such as a dispute over the sales price (value) of the property interests, one of which may involve a court-ordered sale of the entire property with a distribution of the proceeds among the tenants.
“In this type of situation, the federal income tax implications, if any, for A, B, and/or C would depend on what actually takes place.
“Again, given the nature of the questions, which involve not only federal income tax law implications but also call into play property laws, I believe it may be very productive for you to visit with a real estate attorney and/or tax professional.”
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