Q: Our pastor will soon retire after 30 years of service to our church. The pastor and his wife have resided in our church parsonage for all of these years, and the church board would like to sell the parsonage to the pastor at half of its market value as a retirement gift in recognition of his services. Some board members believe that the difference between the market value of the parsonage and the sales price must be reported as taxable income by the church on the pastor's W-2, but others disagree. How should we handle this?
A: If a church allows an employee to buy church property at less than fair market value, the employee ordinarily realizes taxable income in the amount by which the property's fair market value exceeds the bargain sale price. Treas. Reg. 1.61-2(d)(2). This assumes that the property is owned by the church debt-free, or that the church remains responsible for any indebtedness.