North Dakota Administrative Code › Title 81 - Tax Commissioner › Article 81-03 - Income Taxes and Privilege Taxes Based on Income › Chapter 81-03-09 - Division of Income › Section 81-03-09-20 - Property factor - Valuation of rented property

Current through Supplement No. 393, July, 2024
1. Property
				rented by the taxpayer is valued at eight times its net annual rental rate. The
				net annual rental rate for any item of rented property is the annual rental
				rate paid by the taxpayer for such property, less the aggregate annual
				subrental rates paid by subtenants of the taxpayer. See sections
				81-03-09-32,
				81-03-09-33, and
				81-03-09-34 for special sections
				where the use of such net annual rental rate produces a negative or clearly
				inaccurate value or where property is used by the taxpayer at no charge or
				rented at a nominal rental rate.
Subrents are not deducted when the subrents constitute
				  business income because the property which produces the subrents is used in the
				  regular course of a trade or business of the taxpayer when it is producing such
				  income. Accordingly there is no reduction in its value.
Example a: The taxpayer receives subrents from a bakery
				  concession in a food market operated by the taxpayer. Since the subrents are
				  business income they are not deducted from rent paid by the taxpayer for the
				  food market.
Example b: The taxpayer rents a five-story office building
				  primarily for use in its multistate business, uses three floors for its offices
				  and subleases two floors to various other businesses and persons such as
				  professional people, shops, and the like. The rental of the two floors is
				  incidental to the operation of the taxpayer's trade or business. Since the
				  subrents are business income they are not deducted from the rent paid by the
				  taxpayer.
Example c: The taxpayer rents a twenty-story office building
				  and uses the lower two stories for its general corporation headquarters. The
				  remaining eighteen floors are subleased to others. The rental of the eighteen
				  floors is not incidental to but rather is separate from the operation of the
				  taxpayer's trade or business. Since the subrents are nonbusiness income they
				  are to be deducted from the rent paid by the taxpayer.
2. "Annual rental rate" is the amount paid as
				rental for property for a twelve-month period, that is, the amount of the
				annual rent. Where property is rented for less than a twelve-month period, the
				rent paid for the actual period of rental shall constitute the "annual rental
				rate" for the tax period. However, where a taxpayer has rented property for a
				term of twelve or more months and the current tax period covers a period of
				less than twelve months, due, for example, to a reorganization or change of
				accounting period, the rent paid for the short tax period shall be annualized.
				If the rental term is for less than twelve months, the rent shall not be
				annualized beyond its term. Rent shall not be annualized because of the
				uncertain duration when the rental term is on a month-to-month basis.
Example d: Taxpayer A which ordinarily files the taxpayer's
				  return based on a calendar year is merged into taxpayer B on April thirtieth.
				  The net rent paid under a lease with five years remaining is two thousand five
				  hundred dollars a month. The rent for the tax period January first to April
				  thirtieth is ten thousand dollars. After the rent is annualized, the net rent
				  is thirty thousand dollars (two thousand five hundred dollars times twelve).
Example e: Same facts as in example a except that the lease
				  would have terminated on August thirty-first. In this case, the annualized net
				  rent is twenty thousand dollars (two thousand five hundred dollars times
				  eight).
3. "Annual rent"
				is the actual sum of money or other consideration payable, directly or
				indirectly, by the taxpayer or for its benefit for the use of the property and
				includes:
a. Any amount payable for the use
				of real or tangible personal property, or any part thereof, whether designated
				as a fixed sum of money or as a percentage of sales, profits, or otherwise.
Example: A taxpayer, pursuant to the terms of a lease, pays a
				  lessor one thousand dollars per month as a base rental and at the end of the
				  year pays the lessor one percent of its gross sales of four hundred thousand
				  dollars. The annual rent is sixteen thousand dollars, twelve thousand dollars
				  plus one percent of four hundred thousand dollars or four thousand dollars.
b. Any amount payable as
				additional rent or in lieu of rents, such as interest, taxes, insurance,
				repairs, or any other items which are required to be paid by the terms of the
				lease or other arrangement, not including amounts paid as service charges, such
				as utilities, janitor services, and so forth. If a payment includes rent and
				other charges unsegregated, the amount of rent shall be determined by
				consideration of the relative values of the rent and the other items.
Example 1: A taxpayer, pursuant to the terms of the lease,
				  pays the lessor twelve thousand dollars a year rent plus taxes in the amount of
				  two thousand dollars and interest on a mortgage in the amount of one thousand
				  dollars. The annual rent is fifteen thousand dollars.
Example 2: A taxpayer stores part of the taxpayer's inventory
				  in a public warehouse. The total charge for the year was one thousand dollars
				  of which seven hundred dollars was for the use of storage space and three
				  hundred dollars for inventory insurance, handling and shipping charges, and
				  cash on delivery collections. The annual rent is seven hundred dollars.
"Annual rent" does not include incidental day-to-day expenses
				  such as hotel or motel accommodations, daily rental of automobiles, and so
				  forth.