Church & Clergy Tax Guide

In March 2019, a three-judge panel of a federal appeals court (the Seventh Circuit Court of Appeals) unanimously affirmed the constitutionality of the housing allowance. Gaylor v. Mnuchin, 919 F.3d 420 (7th Cir. 2019). It based its ruling on two grounds:

(1) The Lemon test

First, it applied the so-called Lemon test, which dates back to a 1971 Supreme Court ruling in Lemon v. Kurtzman, 403 U.S. 602 (1971), in which the Court announced a three-part test for evaluating claims that a state or federal law, such as the housing allowance, constitutes an impermissible establishment of religion under the First Amendment’s nonestablishment of religion clause. Under the Lemon test, a law challenged on establishment clause grounds is valid if it meets three conditions: first, it has a clearly secular purpose; second, it has a primary effect that neither advances nor inhibits religion; and third, the law does not foster an excessive entanglement between church and state. The court concluded that all three elements were met, and so the housing allowance did not violate the First Amendment’s ban on an establishment of religion.

The court concluded that there was not one but three legitimate secular purposes underlying the housing allowance:

(2) Historical significance

The court based its decision on a second ground that it called the “historical significance test.” According to several rulings by the United States Supreme Court, the establishment clause must be interpreted with reference to historical practices. In other words, the longer a practice has gone unchallenged, the more likely it will survive a challenge under the establishment clause. A perfect example of this is a 1983 Supreme Court decision upholding the constitutionality of legislative chaplains. The Court pointed out that the very first session of Congress, in which the First Amendment’s establishment clause was drafted, also provided funds for congressional chaplains. That’s pretty strong evidence that congressional chaplains do not constitute an unconstitutional establishment of religion. The appeals court noted that there are over 2,500 state and federal laws providing tax exemptions of various sorts to religion, and this practice, dating back to the founding of the nation, reinforced the constitutionality of the housing allowance.

The FFRF chose not to appeal the decision by the Seventh Circuit Court of Appeals. It is possible that it, or another hostile organization, will sue in another court. Predicting the future status of a tax benefit such as the housing allowance is a difficult task, but a solid case can be made for the continuation of this benefit for years to come based on the compelling logic of the appeals court’s decision (which was based squarely on rulings by the Supreme Court). Any developments will be addressed in future editions of this tax guide.

How should churches and pastors respond to this ruling? Consider the following:

The three most common housing arrangements for ministers are (1) living in a church-provided parsonage, (2) renting a home or apartment, or (3) owning a home. The tax code contains a significant benefit for each housing arrangement. The rules are summarized below:

These rules (summarized in Table 6-1) represent the most significant tax benefits enjoyed by ministers. Yet many ministers either fail to claim them or do not claim enough. In some cases this results from tax advisers who are unfamiliar with ministers’ taxes.

Because the rules for ministers living in church-owned parsonages differ from the rules that apply to ministers who own or rent their home, this chapter will be divided into two sections. See “Parsonages” on page  for a summary of the requirements for obtaining the full benefit available to ministers who live in a church-owned parsonage. The rules that apply to ministers who rent or own their homes are considered under “Owning or Renting Your Home” on page .

Since 1921 ministers have been permitted to exclude from their gross income for income tax purposes the annual fair rental value of a church-owned parsonage provided to them rent-free as part of their compensation for services rendered to the church. Congress has never explained the justification for this rule. Presumably, it is based on the principle that the rental value of lodging furnished rent-free to an employee on an employer’s business premises should be excluded from gross income if it is furnished “for the convenience of the employer” and the employee must accept such lodging to adequately perform his or her duties. IRC 119.

Section 107 of the tax code says simply that “in the case of a minister of the gospel, gross income does not include—(1) the rental value of a home furnished to him as part of his compensation; or (2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.”

Note the following four considerations.

Minister of the gospel

The rental value of a parsonage and a parsonage allowance are nontaxable fringe benefits for ministers. The definition of minister for federal tax purposes is addressed in Chapter 3.

Compensation for the exercise of ministry

The annual rental value of a parsonage and the portion of a minister’s compensation designated in advance by his or her employing church as a parsonage allowance are excluded from income in computing federal income taxes only if they represent compensation for services performed in the exercise of ministry. The income tax regulations specify that the parsonage or parsonage allowance must be “provided as remuneration for services which are ordinarily the duties of a minister of the gospel.” In other words, the parsonage and “parsonage allowance” exclusions are available only if

These eligibility requirements are addressed in Chapter 3.

An exclusion

A parsonage allowance and the annual rental value of a church-provided parsonage are exclusions from gross income rather than deductions in computing or reducing adjusted gross income. As a result, they are not reported on Form 1040. Many ministers find this confusing and think they are not receiving a tax benefit unless they can deduct something on their tax return. In fact, some ministers erroneously deduct the annual rental value of a parsonage. This practice clearly violates federal tax law.

Keep in mind that virtually any other worker who receives rent-free use of an employer-provided home must include the annual rental value of the home in his or her gross income in computing both income taxes and Social Security taxes. Ministers, however, do not. This is a significant benefit. As noted below, the annual rental value of a parsonage (and any additional parsonage allowance designated by a church) must be included in self-employment earnings on Schedule SE (Form 1040) in computing a minister’s Social Security tax liability.

Table 6-1: Tax Consequences of Various Clergy Housing Arrangements

Example:
Frank lives in Chicago and works for a large company. His employer wants to transfer Frank to a Los Angeles office for two years and then return him to Chicago. The company allows Frank to live in a home it owns in Los Angeles for the two-year term. The annual rental value of the home provided to Frank rent-free is income to him in computing both income tax and Social Security tax. So if Frank’s annual salary is $50,000 and the annual rental value of the Los Angeles home is $15,000, Frank’s employer must report compensation of $65,000 on Frank’s Form W-2.

Example:
Same facts as the preceding example except that Frank is a minister who leaves a church in Chicago to accept a pastoral position in Los Angeles and that the Los Angeles church provides him with rent-free use of a church-owned parsonage. Frank’s W-2 income would be only $50,000 (not $65,000). The annual rental value of the home is not reported as taxable income. This is a significant benefit compared to the previous example involving an employee who was not a minister, and it will result in a tax savings of several thousand dollars. Some ministers erroneously deduct the rental value of their parsonage from their taxable income. For example, assume that Frank instructs his church treasurer to reduce his W-2 income by $15,000 so that only $35,000 is reported. This practice clearly violates federal law and should be avoided. The tax benefit is that Frank does not have to report the annual rental value of the home ($15,000) as income in addition to his $50,000 salary. Note that Frank would have to pay Social Security taxes on the rental value of the parsonage (assuming that he is not exempt from Social Security coverage).

Valuing the exclusion

Section 107 excludes the annual rental value of a parsonage provided rent-free to a minister as compensation for ministerial services as well as an allowance paid to a minister that is used to pay expenses incurred in maintaining the parsonage (e.g., utilities, repairs, furnishings). Ministers who live in a church-owned parsonage do not report the annual rental value of the parsonage as income, and the church is not required to declare an allowance in the amount of the annual rental value of the parsonage. The exclusion is automatic. However, if the minister incurs any expenses in living in the parsonage, he or she may exclude them only to the extent that they do not exceed a parsonage allowance declared in writing and in advance by the church board. See Illustration 6-1 for an example of a parsonage allowance designation.

Example:
Pastor W lives rent-free in a church-owned parsonage having an annual rental value of $12,000 in 2025. The church expects Pastor W to incur some expenses in living in the parsonage, so it provides him with an allowance of $300 each month. His salary (not including the monthly allowance) was $45,000 in 2025. On his 2025 federal income tax return, Pastor W would not report the annual rental value of the parsonage ($12,000) as income, even though the church never designated that amount as a parsonage allowance. However, he would have to report the total monthly allowances ($3,600) as income unless the church board declared a parsonage allowance in writing and in advance of at least $3,600. The rental value of the parsonage and parsonage allowance are taxable in computing self-employment taxes. Eden v. Commissioner, 41 T.C. 605 (1961). See also Revenue Ruling 59-350.

Example:
Pastor R lives rent-free in a church-owned parsonage having an annual rental value of $12,000 in 2025. The church pays the utilities charged to the parsonage, which amount to $3,000 for 2025. The IRS Tax Guide for Churches and Religious Organizations specifies that “a minister who is furnished a parsonage may exclude from income the fair rental value of the parsonage, including utilities.” In effect, the church is designating this amount as a parsonage allowance each month by paying it. While the $3,000 does not represent taxable income to Pastor R for income tax reporting, it does for self-employment (Social Security) tax reporting; so Pastor R must add the $3,000 to self-employment earnings in computing the self-employment tax. The annual rental value of the parsonage ($12,000) is also subject to the self-employment tax.

Example:
IRS Publication 517 contains the following example: Pastor Roger Adams receives an annual salary of $39,000 as a full-time minister. The $39,000 includes $5,000 that is designated as a rental allowance to pay utilities. His church owns a parsonage that has a fair rental value of $12,000 per year. The church gives Pastor Adams the use of the parsonage. He isn’t exempt from SE tax. He must include $51,000 ($39,000 plus $12,000) when figuring his net earnings for SE tax purposes. The results would be the same if, instead of the use of the parsonage and receipt of the rental allowance for utilities, Pastor Adams had received an annual salary of $51,000 of which $17,000 ($5,000 plus $12,000) per year was designated as a rental allowance.

Ministers who live in a church-provided parsonage often incur expenses in maintaining the parsonage. Common examples include utilities, repairs, insurance, and furnishings. The portion of a minister’s compensation that is designated in advance by the church as a parsonage allowance is not subject to federal income taxes, to the extent the allowance represents compensation for ministerial services; is used to pay parsonage-related expenses such as utilities, repairs, and furnishings; and does not exceed the fair rental value of the parsonage (furnished, plus utilities).

The income tax regulations specify that the designation of the allowance may be contained in “an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action.” The regulations further provide that “the designation . . . ​is a sufficient designation if it permits a payment or a part thereof to be identified as a payment of rental allowance as distinguished from salary or other remuneration.” Treas. Reg. 1.107-1(b).

In other words, the designation must simply distinguish a part of the minister’s compensation as a parsonage allowance. This can be done by giving a minister two separate checks—one designated as salary and the other as the parsonage allowance. This approach is not necessary, since a church that has designated a portion of a minister’s compensation as a parsonage allowance has thereby made the required identification, and it is free to issue a minister one check per pay period that combines both salary and the parsonage allowance.

Illustration 6-1

The church’s designation should be in writing, although if a board orally agrees to a specific allowance and neglects to make a written record of its action, it could draft an appropriate record of its action at a later time, dated as of the earlier meeting. Kizer v. Commissioner, T.C. Memo. 1992-584.

The Tax Court has ruled that an oral designation is sufficient since “there is no requirement that the designation be in writing.” Libman v. Commissioner, 44 T.C.M. 370 (1982). This practice should be avoided, however, since it will always create problems of proof.

Illustration 6-2

A parsonage allowance should be designated by the same body (a board or the membership) that approves compensation. A parsonage allowance must be designated in advance since it is nontaxable only to the extent it is used to pay parsonage-related expenses. Ideally, a parsonage allowance should be designated in advance of each new year. A sample resolution that accomplishes this is set forth in Illustration 6-6 on page . If a church fails to designate a parsonage allowance before the start of a new year, it is not lost for the entire new year. Rather, the church can designate a parsonage allowance at any time during the year for the remainder of that year. To illustrate, if a church discovers on March 10, 2025, that it has not yet designated a parsonage allowance for its pastor for that year, it can do so on that date for the remainder of the year.

Example:
A minister reduced his taxable income by the amount of a parsonage allowance. The IRS audited the minister and determined that he was not eligible for a parsonage allowance, since no evidence existed that the church had ever designated one. The Tax Court agreed. It noted that the minister had the “burden of proving that the amount at issue was properly designated as a rental allowance by official church action before payment” and concluded that “the record is devoid of any such evidence.” Logie v. Commissioner, T.C. Memo. 1998-387.

An additional requirement, not mentioned in section 107, is that the annual rental value of a parsonage (or a parsonage allowance declared by a church) must be reasonable in amount. IRC 501(c)(3). Providing a minister with a parsonage (or parsonage allowance) that is excessive in amount may constitute unreasonable compensation. Such a finding could jeopardize the tax-exempt status of the church. It also could trigger intermediate sanctions against the minister and the church board members who approved the transaction. Intermediate sanctions are excise taxes the IRS can assess because of an “excess benefit transaction” favoring a director or officer. See “General Considerations” on page  for a discussion of unreasonable compensation and intermediate sanctions.

The IRS Tax Guide for Churches and Religious Organizations states that “a minister who is furnished a parsonage may exclude from income the fair rental value of the parsonage, including utilities. However, the amount excluded cannot be more than the reasonable pay for the minister’s services.”

Example:
A federal court noted that a prominent televangelist lived in a parsonage and also received a housekeeping and maintenance allowance and a housing allowance, despite the fact that his ministry paid all of his utilities and other housing expenses. Such payments clearly were above any reasonable parsonage-related expenses, in the court’s judgment. This case illustrates that ministers who live in a parsonage and who pay none of the expenses of maintaining the parsonage are not eligible for a parsonage allowance exclusion. Heritage Village Church and Missionary Fellowship, Inc., 92 B.R. 1000 (D.S.C. 1988).

A reasonable basis exists for the conclusion that ministers who live in a church-owned parsonage can exclude from gross income not only the annual rental value of the parsonage but also a parsonage allowance designated by the church, to the extent the allowance represents compensation for ministerial services; is used to pay parsonage-related expenses such as utilities, repairs, and furnishings; and does not exceed the fair rental value of the parsonage (furnished, plus utilities). This conclusion is supported by the following precedent:

IRS Publication 517

The current edition of IRS Publication 517 (Social Security and Other Information for Members of the Clergy and Religious Workers) clearly recognizes that ministers who live in a church-provided parsonage may have some of their compensation designated in advance by their employing church as a parsonage allowance: “You can exclude from gross income the fair rental value of a house or parsonage, including utilities, furnished to you as part of your earnings. However, the exclusion cannot be more than the reasonable pay for your services. If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost” (emphasis added). IRS Publication 517 includes the following example.

Example:
Rev. Layne Baker is a full-time minister. The church allows Rev. Baker to use a parsonage that has an annual fair rental value of $24,000. The church pays them [sic] an annual salary of $67,000, of which $7,500 is designated for utility costs. Their [sic] actual utility costs during the year were $7,000. For income tax purposes, Rev. Baker excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility costs). Rev. Baker will report $60,000 ($59,500 salary plus $500 of unused utility allowance). However, their [sic] income for SE tax purposes is $91,000 ($67,000 salary + $24,000 fair rental value of the parsonage).

Revenue Ruling 59-350

In Revenue Ruling 59-350 the IRS ruled that a minister who lived in a church-owned parsonage could exclude from gross income that portion of his salary that was designated in advance by his employing church as a parsonage allowance. The IRS observed:

Revenue Ruling 63-156

In Revenue Ruling 63-156 the IRS stated:

Ministers cannot exclude a housing allowance (or the annual fair rental value of a parsonage) when computing their self-employment (Social Security) taxes unless they are retired. The tax code specifies that the self-employment tax does not apply to “the rental value of any parsonage or any parsonage allowance provided after the [minister] retires.” IRC 1402(a)(8).

Therefore, in computing the Social Security tax on Schedule SE of Form 1040, nonretired ministers who live in a church-owned parsonage must include the annual rental value of the parsonage as income on line 2 (of either the short or long Schedule SE, whichever applies). A minister also must include as income any parsonage allowance paid by the church to cover miscellaneous expenses in maintaining the parsonage.

Ministers who have not exempted themselves from paying self-employment (Social Security) tax on their ministerial income must report any parsonage allowance and the annual rental value of a parsonage as income when reporting self-employment taxes on Schedule SE (Form 1040).

The rental value of a parsonage is a question to be determined in each case based on the evidence. Some have suggested that a fair approximation of the monthly rental value of a home can be computed simply by taking 1 percent of the home’s fair market value. For example, if a home has a fair market value of $200,000, its monthly rental value would be $2,000 ($200,000 × 1 percent) and its annual rental value would be $24,000. This method may yield accurate results in some cases, but it will yield inaccurate results in others. Generally, it yields excessive rental values. This approach has never been endorsed by the IRS or any court.

Example:
Pastor T lives in a church-owned parsonage. He is not exempt from Social Security coverage. To avoid any increase in Pastor T’s Social Security tax liability, the church agrees to “rent” the parsonage to Pastor T for $1 each year. Pastor T then lists only $1 as the parsonage’s rental value on his Schedule SE in computing his Social Security tax liability. This practice will not achieve its desired savings in Social Security taxes, since a minister must include the annual rental value of a church-provided parsonage as income on Schedule SE. The annual rental value of the parsonage is not $1. Rather, it is what houses of comparable size and quality in the same vicinity would rent for in an arm’s-length transaction.

Example:
A minister was provided with a parsonage, and in addition, a portion of his annual compensation was designated a parsonage allowance to assist him in paying utilities, furnishings, and other miscellaneous expenses. The annual rental value of a parsonage is taxable in computing a minister’s self-employment (Social Security) tax. The minister claimed that this amount includes any parsonage allowance designated by the church. As a result, he reduced his parsonage’s annual rental value by the parsonage allowance designated by his church in computing his self-employment tax. The Tax Court ruled that this was improper, noting that the minister had “not proven that the stipulated annual rental value of the parsonages already includes amounts designated or received in cash relating to the utility and other household expenses of the parsonages.” Radde v. Commissioner, T.C. Memo. 1997-490 (1997).

Some churches in high-cost areas purchase a parsonage to make housing available to their minister. However, the rental value of such parsonages often is very high, resulting in large increases in the minister’s self-employment taxes. For example, assume that a church purchased a parsonage several years ago that currently is worth several hundred thousand dollars and that has an annual rental value of $25,000. A minister who lives in such a parsonage would need to add the full $25,000 annual rental value in computing his or her earnings subject to the self-employment tax. This will result in an increase in self-employment taxes of nearly $4,000 (without considering any available deductions).

While this is a significant tax increase, keep in mind the following considerations:

Example:
Pastor H excluded a parsonage allowance from his reportable income though his employing church had never designated a portion of his compensation as a parsonage allowance. The Tax Court ruled that Pastor H was not entitled to exclude the allowance, since it had not been designated by his church prior to the time of its payment. Hoelz v. Commissioner, 42 T.C.M. 1037 (1981).

Ministers who live in church-owned parsonages experience a significant disadvantage—they do not acquire equity in a home. To illustrate, assume that Pastor E lives in church-owned parsonages throughout his 35-year career as a minister. When Pastor E retires, he must vacate the parsonage he is occupying, and he has no equity interest in any of the parsonages he has occupied that can be used to acquire a retirement home. If Pastor E had owned homes throughout his career, he would have accumulated equity in the amount of his combined principal mortgage payments plus any appreciation in the value of the homes he owned. At retirement, not only would Pastor E have a home in which he could remain, but he also would have accumulated a significant equity interest.

Some churches have helped ministers who live in parsonages avoid or at least reduce the adverse economic impact of this housing arrangement by providing them with an equity allowance over and above their stated compensation. This allowance is designed to partially or wholly compensate the minister for the lost opportunity of accumulating equity in a home.

Since the purpose of such an allowance is to assist the minister in obtaining suitable housing at retirement, it is important that the allowance not be available to the minister until retirement. One way churches can accomplish this is to deposit the annual equity allowance in a tax-favored retirement program not currently accessible to the minister. Such an arrangement can mitigate the economic hardship faced by many ministers who reside in a church-owned parsonage. However, since an equity allowance ordinarily does not compensate a minister for actual costs incurred in living in a parsonage, it is not excludable from income as a parsonage allowance.

The IRS has issued audit guidelines for its agents to follow when auditing ministers. The guidelines provide agents with the following information regarding parsonages and parsonage allowances:

Internal Revenue Code section 107 provides an exclusion from gross income for a “parsonage allowance” . . . ​. The term “parsonage allowance” includes church provided parsonages, rental allowances with which the minister may rent a home and housing allowances with which the minister may purchase a home. A minister can receive a parsonage allowance for only one home. . . .

The value of the “allowed” parsonage allowance is not included in computing the minister’s income subject to income tax and should not be included in W-2 wages. However, the parsonage allowance is subject to self-employment tax along with other earnings. If a church-owned parsonage is provided to the minister, instead of a housing allowance, the fair rental value of the housing must be determined. Determining the fair rental value is a question of all facts and circumstances based on the local market, but the church and minister have often already agreed on a figure and can provide documentary evidence.

The [parsonage allowance] exclusion only applies if the employing church designates the amount of the parsonage allowance in advance of the tax year. The designation may appear in the minister’s employment contract, the church minutes, the church budget, or any other document indicating official action. An additional requirement . . . ​is that the fair rental value of the parsonage or parsonage allowance is not more than reasonable pay for the ministerial services performed.

The audit guidelines contain the following example:

Example:
A is an ordained minister. She receives an annual salary of $36,000 and use of a parsonage which has an annual rental value of $800 a month, including utilities. She has an accountable plan for other business expenses such as travel. A’s gross income for arriving at taxable income for federal income tax purposes is $36,000, but for self-employment tax purposes it is $45,600 ($36,000 salary + $9,600 annual rental value of parsonage).

The tax status of parsonages and parsonage allowances provided to retired ministers is addressed under “Housing Allowances” on page .

Ministers who own their home do not pay federal income taxes on the amount of their compensation that their employing church designates in advance as a housing allowance to the extent that the allowance represents compensation for ministerial services, is used to pay housing expenses, and does not exceed the fair rental value of the home (furnished, plus utilities). Housing-related expenses include mortgage payments, utilities, repairs, furnishings, insurance, property taxes, additions, and maintenance.

Ministers who rent a home or apartment do not pay federal income taxes on the amount of their compensation that their employing church designates in advance as a housing allowance to the extent that the allowance represents compensation for ministerial services and is used to pay rental expenses such as rent, furnishings, utilities, and insurance.

The previous section addressed parsonages and parsonage allowances. Most ministers, however, do not live in a parsonage. Instead, they either own or rent a home. This section will address the tax rules that apply to these ministers. The tax code uses the term rental allowance for allowances paid to ministers who either rent or own their home. This terminology is confusing, so this text uses the term housing allowance for ministers who either rent or own their home.

Section 107 of the tax code specifies that “in the case of a minister of the gospel, gross income does not include—(1) the rental value of a home furnished to him as part of his compensation; or (2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.”

Following are four important considerations to note:

In general

The income tax regulations specify that the designation of the allowance may be contained in “an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action.”

The regulations further provide that “the designation . . . ​is a sufficient designation if it permits a payment or a part thereof to be identified as a payment of rental allowance as distinguished from salary or other remuneration.” Treas. Reg. 1.107-1(b). In other words, the designation must simply distinguish a part of the minister’s compensation as a housing allowance. This can be done by giving a minister two separate checks—one designated as salary and the other as the housing or rental allowance. But this approach is not necessary, since a church that has designated a portion of a minister’s compensation as a housing or rental allowance has thereby made the required identification, and it is free to issue a minister one check per pay period that combines both salary and the housing allowance.

The church’s designation should be in writing, although if a board orally agrees to a specific allowance and neglects to make a written record of its action, it could draft an appropriate record of its action later, dated as of the earlier meeting. Kizer v. Commissioner, T.C. Memo. 1992-584.

The Tax Court has ruled that an oral designation is sufficient since “there is no requirement that the designation be in writing.” Libman v. Commissioner, 44 T.C.M. 370 (1982). This practice should be avoided, however, since it will always create problems of proof.

Example:
In ruling that a minister was not eligible for a housing allowance exclusion, the Tax Court noted that the “real problem” for the pastor was “the law’s requirement that a parsonage allowance be designated, and “this means that the allowance must be specified in amount at some point before a minister receives it—a minister can’t just dip into church funds to pay his housing expenses as they arise. And a payment that isn’t designated isn’t excludable from income.” The court acknowledged that “tax law has no rubric for designating an allowance—it can be a sum of money written into an employment contract, a line item in a church’s budget, a notation in the minutes of the church’s board, or any other document that proves official action was taken. It doesn’t even need to be in writing. See Libman v. Commissioner, T.C. Memo. 1982-377 (1982). But to qualify as a designation, it must clearly identify the payment of a rental allowance as distinct from a salary or other compensation.” Brown v. Commissioner, T.C. Memo. 2019-69 (2019).

Example:
A traveling evangelist was denied any housing allowance exclusion despite his insistence that various churches in which he had conducted services had orally designated a portion of his compensation as a housing allowance. The Tax Court noted that there was no evidence of such designations and that the minister’s testimony was “marred by numerous inconsistencies.” Holland v. Commissioner, 47 T.C.M. 494 (1983).

In summary, if your church board orally designated (in advance) a portion of your compensation as a housing or rental allowance, you should go ahead and claim the exclusion. The church board could “memorialize” its earlier action in a written resolution if your return is audited and your allowance questioned. Such a practice is not recommended.

In advance

Many churches fail to designate a housing allowance by the end of a calendar year for a variety of reasons and discover the omission a few weeks or months into the new year. Is it too late to do so for that year? According to the IRS regulations, the church can still designate a housing allowance for the minister for the remainder of the new year. The regulations state that a housing allowance “means an amount paid to a minister to rent or otherwise provide a home if such amount is designated as rental allowance pursuant to official action taken . . . ​in advance of such payment by the employing church or other qualified organization” (emphasis added). Treas. Reg. 1.107-1(b).

Similarly, IRS Publication 1828 states that “the minister’s church or other qualified organization must designate the housing allowance pursuant to official action taken in advance of the payment” (emphasis added).

As a result, a housing allowance only operates prospectively, never retroactively. This principle is a corollary of the requirement that a housing allowance is nontaxable only to the extent that it is used to pay for housing expenses. This requirement would be compromised if housing allowances could be designated retroactively, after housing expenses are incurred and paid. In such a case, some or all of the allowance would not be used to pay for housing expenses.

Unfortunately, the IRS audit guidelines for ministers incorrectly state that the housing allowance exclusion “only applies if the employing church designates the amount of the parsonage allowance in advance of the tax year” (emphasis added). It is unfortunate that the IRS audit guidelines for ministers contradict the IRS regulations and IRS Publication 1828. The regulations are more authoritative than the audit guidelines, but many IRS agents will follow the guidelines when auditing ministers, and this will result in the unnecessary denial of a housing allowance exclusion to ministers whose church failed to designate an allowance until after the start of the year.

Example:
A pastor performed ministerial services for a congregation that provided him with a monthly rental allowance. The pastor excluded the amount of the housing allowance from his gross income each year in question. The pastor and his employing church later asked the IRS if they could amend the amount of the housing allowance to reflect the true cost of providing the home. The church claimed that the amount of the rental allowance was selected without understanding its legal consequences. The IRS rejected the church’s request. It observed:

Example:
In preparing his income tax return for 2024, Pastor H discovers that his church failed to designate a housing allowance for 2024. He asks his church board to pass a resolution retroactively granting the allowance for 2024. Such a resolution is ineffective, and Pastor H will not be eligible for any housing allowance in 2024. Hoelz v. Commissioner, 42 T.C.M. 1037 (1981); Ling v. Commissioner, 200 F. Supp. 282 (D.D.C. 1962).

Example:
Pastor K was paid a salary by his church, but no portion of the salary was designated by the church as a housing allowance. The Tax Court ruled that Pastor K was not able to exclude any part of the expenses incurred in owning and maintaining his home as a housing allowance, since the church had not designated any portion of Pastor K’s compensation as a housing allowance. Eden v. Commissioner, 41 T.C. 605 (1964).

Example:
A church board orally discussed a new minister’s compensation package with him and agreed to pay him a salary of $30,000, out of which $6,250 was designated as a housing allowance. The board’s housing allowance designation was not recorded in the church minutes or in any other writing. The IRS audited the minister and denied any housing allowance exclusion on the ground that no allowance had been properly designated. The Tax Court disagreed and ruled that the minister was eligible for a housing allowance in the amount of $6,250. It observed:

It is clear that there was discussion about a parsonage allowance for [the minister], and that all of the members of the board of directors [of the church] who testified recollected that he was taking a cut in total compensation to come to their church. The recording secretary, the person whose obligation it was to keep the minutes of the various meetings, had a clear recollection of the discussion and thought that [the minister] was to receive the same amount as a parsonage allowance that he received at [his former church].

The court referred to a 1982 decision (Libman v. Commissioner) in which it ruled that “there is no requirement that the parsonage allowance designation be in writing. Rather, we held, the designation requirement is satisfied upon satisfactory proof of official action.” In the present case, the court concluded that there was sufficient evidence of a proper designation in advance of the year in question, though never committed to writing. Accordingly, the minister was entitled to the housing allowance exclusion. Kizer v. Commissioner, T.C. Memo. 1992-584.

Example:
The IRS ruled that a pastor was not entitled to a housing allowance because there was no evidence that his employing church had designated an allowance for the year in question. In 1982 the church board adopted a motion stating simply that “the pastor’s housing allowance for 1982 will be $10,000.” The pastor claimed a housing allowance of $10,000 in the following year, although the church had not designated such an allowance. The pastor and church maintained that it was their understanding that the 1982 allowance was effective for future years until there was a salary change. As a result, the pastor claimed a $10,000 allowance in 1983. The church board, in 1984, adopted a resolution stating that “the pastor’s salary and housing allowance for 1984 will be the same as 1983.” The IRS concluded:

Example:
The Tax Court noted that gross income does not include, in the case of a minister of the gospel, “the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home.” IRC 107. For a minister to be eligible for this exclusion, the following requirements must be met:

(1) the home or rental allowance must be provided as remuneration for services which are ordinarily the duties of a minister of the gospel; (2) before the payment of this rental allowance, the employing church or other qualified organization must designate the rental allowance pursuant to official action, which may be evidenced in an employment contract or by any other appropriate instrument; and (3) the designation must be sufficient in that it clearly identifies the portion of the minister’s salary that is the rental allowance. Treas. Reg. 1.107–1(a) and (b).

The court noted that “there is no evidence that a rental allowance was designated in an official action between the church and pastor. In fact . . . ​the church never considered the mortgage payments made on the pastor’s behalf to be parsonage allowances. Accordingly, he is not entitled to exclude mortgage payments the church made on his behalf as a parsonage allowance under section 107.” T.C. Memo. 2013-177 (2013).

Who designates the allowance

Section 1.107-1(b) of the income tax regulations provides that the term housing allowance means an amount paid to a minister to rent or otherwise provide a home if such amount is designated as a housing allowance pursuant to official action taken in advance of the payment of such amounts by “the employing church or other qualified organization.”

Example:
An ordained minister was employed as a chaplain by a municipal police department. The police department’s chaplaincy program was established through its joint efforts with a local federation of churches. The minister claimed that amounts designated by the federation as a housing allowance were excludable from his gross income. The IRS maintained that because the minister was employed by the city and not by the federation, the city was the only “other qualified organization” eligible to designate a housing allowance. Since it failed to do so, the minister was not eligible for a housing allowance. The Tax Court reversed the IRS determination and ruled that the minister was entitled to a housing allowance. It noted that as a police chaplain, the minister was under the direct supervision of the chief of police. However, the federation retained supervision over his ecclesiastical performance and maintained day-to-day contact with him and other chaplains. The federation was also involved in the operation of the police chaplaincy program. If a problem arose concerning a police chaplain, a police department official usually would contact the federation to resolve the problem. When a vacancy occurred for a chaplain, the federation assumed primary responsibility for finding a qualified person to fill the vacancy.

The federation annually designated a specific amount of the minister’s salary in advance as a housing allowance even though his salary was paid by the city. The city neither provided him with a home nor designated any portion of his salary as a housing allowance.

The Tax Court concluded that the federation was an “other qualified organization” within the meaning of section 1.107-1(b) of the regulations and that its designation of a portion of his salary as a housing allowance was valid. The Tax Court based its decision on the “constant and detailed involvement of the federation” in the city’s police chaplaincy program. The IRS later acquiesced in the court’s ruling on the ground that the federation’s responsibilities toward the chaplaincy program were similar to those of an employer and that the federation was closely involved with the police department in its employer–employee relationship with the ministers. Boyd v. Commissioner, 42 T.C.M. 1136 (1981).

Some churches fail to designate a housing allowance for their ministers. This practice denies ministers an important tax benefit. If your church fails to designate a housing allowance prior to January 1 for the new year, it should designate an allowance as soon as possible. The housing allowance will be effective from the date it is declared for the remainder of the year. See “Designating a parsonage allowance” on page .

Matching allowances and expenses

Assume that Pastor B receives monthly compensation of $4,000 from First Church, that Pastor B owns or rents his home, that First Church fails to designate a housing allowance for Pastor B for 2025, and that the church board belatedly acts on November 1, 2025, to designate Pastor B’s entire remaining compensation for 2025 ($8,000) as a housing allowance. How large a housing allowance exclusion can Pastor B claim? At the very least, he will be able to exclude housing expenses incurred in November and December. But what if his housing expenses amount to only $2,000 in November and December? Can Pastor B apply the rest of the housing allowance ($6,000) to housing expenses incurred in months prior to November? This question has never been addressed by the IRS or the courts.

Section 107 of the tax code provides that the housing allowance exclusion covers “the rental allowance paid to [a minister] as part of his compensation to the extent used by him to rent or provide a home” (emphasis added). This language suggests that the housing expenses must be paid out of the designated allowance, meaning that Pastor B (in the above example) would only be able to exclude housing expenses incurred in November and December.

A broader interpretation

Some interpret section 107 more broadly and claim that the critical event is the designation of a portion of Pastor B’s salary as a housing allowance. Once an allowance is declared (even if later in the year), there is no reason why it should not be allocated to expenses incurred in prior months of the same year. Under this broader interpretation of section 107, the church’s belated action would permit Pastor B to exclude his remaining salary of $4,000 from his gross income as a housing allowance exclusion (assuming his actual expenses in owning or maintaining his home are at least this amount for the year), resulting in a substantial savings in income taxes.

The main problem with this approach is that a housing allowance is nontaxable only to the extent it is used to pay for housing expenses. By November, Pastor B has already paid for most of his housing expenses for the first 10 months of the year (mortgage payments, utilities, insurance, taxes, etc.), and so it impossible for him to use the $8,000 allowance designated in November for these expenses.

Ministers who adopt this broader interpretation must recognize that such a position has never been approved by the IRS or the courts, and it is an aggressive position that should not be adopted without professional advice.

Example: 
An administrator of a Jewish synagogue was not eligible for a housing allowance, since there was no evidence that a housing allowance had ever been properly designated for him. Haimowitz v. Commissioner, T.C. Memo. 1997-40 (1997); McCurry v. Commissioner, 56 T.C.M. 253 (1988).

Background

For many years, section 107 of the tax code stated that “in the case of a minister of the gospel, gross income does not include . . . ​the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home.” This language required little explanation. The portion of a minister’s church-designated housing allowance that was used to pay for housing-related expenses was nontaxable for federal income tax reporting purposes. Stated differently, ministers could exclude from taxable income the lesser of (1) the church-designated housing allowance, or (2) the actual amount of housing-related expenses paid during the year.

In 1971 the IRS imposed an additional limitation: the nontaxable portion of a church-designated housing allowance could not exceed the fair rental value of the minister’s home (furnished, plus utilities). Revenue Ruling 71-280. As a result, a housing allowance was nontaxable only to the extent it was used to pay for housing expenses and did not exceed the fair rental value of the home (furnished, plus utilities).

The IRS offered various arguments to defend the annual rental value test, including the following: (1) the rental value test prevents ministers who own their homes from receiving a greater tax benefit than those who live in a church-provided parsonage; (2) the rental value test prevents ministers from acquiring expensive homes; and (3) the rental value test prevents ministers with other sources of income from acquiring more expensive homes by allocating a larger amount of their church compensation to a nontaxable housing allowance.

The Warren case

The United States Tax Court ruled in 2000 that a housing allowance is nontaxable for income tax reporting so long as it is used to pay for housing-related expenses. Warren v. Commissioner, 114 T.C. 23 (2000). The court threw out the annual “fair rental value” test the IRS adopted in 1971. The IRS appealed the Warren case to the ninth circuit federal court of appeals in California. On March 5, 2002, a three-judge panel of the court issued a surprising decision. Two of the panel’s three judges issued an order asking the parties and a law professor to submit additional briefs to the court addressing the following issues:

In referring to the housing allowance, the court observed that “it appears that no similar exemption is afforded any member of any other profession, whether serving a for-profit or non-profit institution.” This off-hand comment left little doubt that the court had made up its mind that the housing allowance was unconstitutional. This conclusion was reinforced by the court’s reference to the following quotation from an earlier Supreme Court case: “When government directs a subsidy exclusively to religious organizations that is not required by the free exercise [of religion] clause and that either burdens non-beneficiaries markedly or cannot reasonably be seen as removing a significant state-imposed deterrent to the free exercise of religion . . . ​it provides unjustifiable awards of assistance to religious organizations and cannot but convey a message of endorsement to slighted members of the community.” Texas Monthly, Inc. v. Bullock, 489 U.S. 1 (1989).

Clergy Housing Allowance Clarification Act

In response to this threat to the housing allowance, the Clergy Housing Allowance Clarification Act of 2002 (H.R. 4156) was introduced in the House of Representatives. It was enacted on April 16, 2002, by a vote of 408 to 0. The Senate unanimously enacted the same bill on May 2. President George W. Bush signed it into law on May 20.

The Act had one purpose—to amend the tax code to reinstate the fair rental value limit on ministers’ housing allowances so that the IRS would dismiss its appeal of the Warren case and thereby deprive the federal appeals court of the opportunity to address the constitutionality of the housing allowance on its own initiative. As amended, section 107 now reads: “In the case of a minister of the gospel, gross income does not include—(1) the rental value of a home furnished to him as part of his compensation; or (2) the rental allowance paid to him as part of his compensation to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.”

The Act had the desired effect. The IRS agreed to dismiss the appeal of the Warren case, and the federal appeals court eventually issued an order formally dismissing the case.

Example:
A retired pastor had $50,000 distributed from his retirement account in 2024 and had the entire amount designated as a housing allowance. The pastor used the distribution for a down payment on a new home and other housing-related expenses. The fair rental value of the home (furnished, plus utilities) was $20,000. The nontaxable portion of the retired pastor’s $50,000 housing allowance is limited to $20,000 (the fair rental value of his home). As a result, $30,000 of the housing allowance is taxable in computing income taxes.

The Clergy Housing Allowance Clarification Act of 2002 amended the tax code to limit the nontaxable portion of a housing allowance for ministers who own or rent their home to the annual fair rental value of the home furnished, plus utilities). While the Act imposes a fair rental value limit, it does not explain what this means. The IRS has provided no help. Its audit guidelines for ministers instruct agents that “determining the fair rental value of a home is a question of all facts and circumstances based on the local market” and that “the church and minister have often already agreed on a figure and can provide documentary evidence.”

In summary, ministers have been given no guidance by Congress, the IRS, or the courts regarding the meaning of fair rental value. Here are three ways some ministers attempt to define this term:

Homes owned less than one year

One question that is not addressed by the tax code or by the IRS or the courts is whether the fair rental value limit should be prorated if a minister owns a home for less than one year. Consider an example. Pastor Tim accepts a pastoral position with a church in June 2025 and purchases a new home that he occupies for the last six months of the year. The church pays him a salary and a housing allowance. Assume that the annual fair rental value of the home is $15,000. However, since Pastor Tim only occupied the home for six months of the year, the rental value of the home for those months was $7,500.

When Pastor Tim computes the nontaxable amount of his church-designated housing allowance for 2025, does the fair rental value limit refer to the annual fair rental value ($15,000) of his home or the prorated fair rental value for the portion of the year he occupied the home ($7,500)?

While the IRS has not addressed this question, it is likely that it would use a prorated rental value limit in calculating Pastor Tim’s housing allowance exclusion. Here’s why. For many years the tax code excluded the rental value of a parsonage from a minister’s taxable income, but not a housing allowance designated by a church. This changed in 1954, when Congress amended the tax code (section 107) to make church-designated housing allowances nontaxable in computing income taxes to the extent they are used to pay housing expenses. A committee report explained this change as follows:

Under present law, the rental value of a home furnished a minister of the gospel as a part of his salary is not included in his gross income. This is unfair to those ministers who are not furnished a parsonage, but who receive larger salaries (which are taxable) to compensate them for expenses they incur in supplying their own home. Your committee has removed the discrimination in existing law by providing that the present exclusion is to apply to rental allowances paid to ministers to the extent used by them to rent or provide a home.

According to this language, the housing allowance exclusion was created to eliminate the tax code’s former preference for ministers who reside in a parsonage. In the above example, this would mean that Pastor Tim’s computation of his home’s fair rental value should only be for the six months he lived there since if he had lived in a church-provided parsonage, he would have occupied it for only six months. On the other hand, if Pastor Tim can use his home’s fair rental value for the entire year as his limitation, this puts him in a more favorable position than he would have been in had he occupied the parsonage for six months.

Logically, then, the fair rental value should be prorated to reflect the portion of the year a minister occupies a home. This will result in more taxes (because of a lower rental value limit). Any official guidance will be reported in future editions of this tax guide.

Furniture

The tax code specifies that the nontaxable portion of a housing allowance (for ministers who own their home) cannot exceed “the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.” Ministers and their tax advisors have interpreted this language in two ways:

Neither the IRS nor any court has addressed this issue in a published ruling. Until definitive guidance is provided, the second option should be viewed as an aggressive tax position that likely would be rejected by the IRS in an audit, and it should not be used without the advice of a tax professional.

Method of determination

Some churches simply declare a percentage (e.g., 40 percent) of a minister’s salary as a housing allowance. This practice should be avoided since it bears no correlation to actual housing expenses. Others declare a monetary amount based on a minister’s projected expenses for the year. In either case, the church should make a separate designation for each minister on staff (churches can designate housing allowances for all ministers on staff).

The allowance should be designated each year for each minister. General designations for several unspecified ministers are not adequate. In some cases it is appropriate for a church to designate a minister’s entire church compensation as a housing allowance. For example, assume that Don is a minister of a small mission church that is only able to pay him $5,000 per year. Assume further that Don works a part-time secular job to support himself. If Don has at least $5,000 of housing expenses, it would seem perfectly reasonable and appropriate for his church to designate his entire salary as a housing allowance. No court (or the IRS) has ever ruled that a housing allowance designated by a church cannot be fully claimed by a minister who has secular earnings. There is no requirement that ministers allocate their housing expenses to their church and secular earnings on a pro rata basis.

Some churches designate a housing allowance in the amount of a minister’s actual housing expenses. This practice should be avoided since it may not satisfy the requirement that housing allowances be designated in advance. Under this approach there is no way to know how much of a minister’s compensation is a housing allowance until after expenses are incurred. This is not consistent with the income tax regulations.

Limitations

The IRS has stated that there are no limitations on how much of a minister’s compensation can be designated by his or her employing church as a housing allowance. However, as noted above, this means little since the nontaxable portion of a church-designated housing allowance for ministers who own or rent their home cannot exceed the lesser of (1) actual housing expenses, or (2) the fair rental value of the home (furnished, plus utilities).

In addition, the IRS has ruled that a housing allowance may not be excluded by a minister to the extent that it represents “unreasonable compensation” for the minister’s services. Revenue Ruling 78-448. For example, a televangelist whose ministry designates hundreds of thousands of dollars of his compensation each year as a housing allowance would likely have the reasonableness of the allowance challenged by the IRS in the event of an audit. Providing a minister with a housing allowance (or parsonage) that is excessive in amount may constitute unreasonable compensation. Such a finding could jeopardize the tax-exempt status of the church or ministry. Further, the allowance may constitute an excess benefit transaction, triggering intermediate sanctions against the pastor (and the board members who approved it) in the form of substantial excise taxes. See “General Considerations” on page  for a discussion of unreasonable compensation and intermediate sanctions.

Example:
The Tax Court ruled that the portion of a pastor’s salary designated by his church as a housing allowance was not subject to income taxation even though it comprised most of his compensation. The pastor was employed by a small church that paid him an annual compensation of $13,500, of which $13,000 ($250 per week) was designated as a housing allowance. The IRS audited the pastor’s tax return. It conceded that the church had designated the allowance, but it was disallowed because the pastor had failed to prove that the allowance was spent on housing expenses.

The Tax Court reversed the IRS determination and ruled that the pastor was entitled to exclude the housing allowance from his taxable income. It noted that the pastor had “credibly testified that the housing allowance provided by [the church] was insufficient to cover his mortgage expenses and utilities. In this respect [he] testified that his mortgage payment alone was approximately $1,000 per month before refinancing. Consequently, we find that the $13,000 per year parsonage allowance he received was used to provide a home. Accordingly, the $13,000 annual housing allowance . . . ​is not includable in petitioners’ gross income.”

In the past, some have questioned whether most or all of a pastor’s compensation can be designated as a housing allowance. It is worth noting that neither the IRS nor the Tax Court questioned the housing allowance in this case on the ground that it comprised over 95 percent of the pastor’s total church compensation. Holmes v. Commissioner, T.C. Summary Opinion 2010-42 (2010).

The housing allowance designated by a church is not necessarily exempt from tax in computing federal income taxes. Section 107 of the tax code specifies that a housing allowance is excluded from income tax only to the extent it is used for actual expenses incurred by the minister in owning or renting a home and does not exceed the fair rental value of the home (furnished, plus utilities).

For ministers who own their homes, actual expenses include:

If actual expenses exceed the church-designated allowance and the fair rental value of the home, the minister can only exclude the allowance. This illustrates why churches should always be liberal in designating housing allowances.

In Publication 517 the IRS states the rule as follows:

If you own your home and you receive as part of your salary a housing or rental allowance, you may exclude from gross income the smallest of:

Example:
Pastor C is paid a salary of $40,000 for year 2025. The church board designates $25,000 of this amount as a housing allowance. In February Pastor C purchases a new home and makes a down payment of $15,000. Assume that he has additional housing expenses of $7,000 for the year and that the fair rental value of the home (furnished, including utilities) is $10,000 for the portion of the year he occupied it. Pastor C’s housing allowance is nontaxable only to the extent it does not exceed actual housing expenses or the rental value of his home. Stated differently, the amount of the housing allowance that is excluded in computing federal income taxes is the lowest of the following three amounts: (1) the church-designated housing allowance ($25,000); (2) actual housing expenses ($22,000); or (3) the rental value of the home ($10,000). Since the rental value is the lowest amount, this is the amount of Pastor C’s housing allowance that is nontaxable.

Example:
Pastor L’s roof collapsed during a snowstorm late in 2024. Knowing repairs would cost $5,000 and that he incurs about $10,000 of additional housing expenses per year, Pastor L has the church board designate $15,000 of his 2025 salary of $40,000 as a housing allowance. Assume that the fair rental value of the home (furnished, including utilities) is $10,000. Pastor L’s nontaxable housing allowance would be the least of the following three amounts: (1) the church-designated housing allowance ($15,000); (2) actual housing expenses ($15,000); or (3) the rental value of the home ($10,000). Since the rental value is the lowest amount, this is the amount of Pastor L’s housing allowance that is nontaxable.

Example:
A church board is considering the 2025 compensation package for Pastor B. It decides on total compensation of $30,000. Pastor B informs the board that she will have ordinary housing expenses of $10,000 but that she also will be incurring remodeling expenses of an additional $10,000. The board is uncomfortable designating two-thirds of Pastor B’s total compensation as a housing allowance. If the fair rental value of the home is significantly lower than $20,000, there is no advantage in designating a housing allowance of this amount.

What happens to ministers who own their homes after they pay off their home mortgage loan? Are they still eligible for a housing allowance, and if so, for what expenses? Can they include the annual fair rental value of their home in computing their housing allowance exclusion?

Ministers who own their home may still claim a housing allowance exclusion (assuming they otherwise qualify), but since the exclusion may never exceed the actual expenses incurred in owning or maintaining a home, it will be reduced (often significantly) when the home mortgage loan is paid off. Ministers still will incur some expenses (e.g., utilities, repairs, improvements, furnishings, property taxes, and insurance) to which a housing allowance can be applied. But since the annual rental value of the home is not an actual expense, it cannot be included in computing the exclusion. Swaggart v. Commissioner, 48 T.C.M. 759 (1984).

In the past some ministers who had paid off their homes obtained a home equity loan (secured by a new home mortgage) and included the mortgage payments (principal and interest) in computing their housing allowance exclusion. The IRS has ruled that this practice is not permissible unless the home equity loan was obtained for direct housing-related expenses. The fact that the loan is secured by a mortgage on the home is not enough. IRS Letter Ruling 9115051. The Tax Court has agreed with this conclusion. Rasmussen v. Commissioner, T.C. Memo. 1994-311. The court observed:

A related and more difficult question is how to calculate a housing allowance when a minister adds to an existing home mortgage. For example, assume that a minister refinances a home mortgage and increases the indebtedness, or obtains a second mortgage loan on top of an existing home mortgage loan, or obtains a home equity loan. What are the tax consequences in these cases if the additional mortgage debt is obtained to finance expenses not directly related to the home (e.g., education, medical care, vacations, or a new car)? In each of these cases, the minister has a preexisting mortgage loan that was obtained solely to facilitate the purchase of the home. Unfortunately, neither the IRS nor any court has addressed this question. As noted above, both the IRS and the Tax Court have addressed what happens when a minister’s home is paid off and the minister obtains a subsequent home mortgage loan to finance personal expenses such as medical care and education. Obviously, these rulings provide a reasonable basis for concluding that some form of allocation would be required when a minister adds to an existing mortgage debt for non-housing expenses.

To illustrate, if a minister has an outstanding home mortgage loan in the amount of $50,000 and then obtains a second mortgage loan in the amount of $25,000 for various personal expenses, the mortgage interest payments allocable to the first loan could be considered in computing the minister’s housing allowance exclusion, while the interest paid on the second mortgage loan would not. It would be easy to make such allocations in the case of a second mortgage loan or a home equity loan. The more difficult case involves refinancing. It is likely that the IRS and the courts would again apply some type of allocation rule. One possibility would be to make an allocation at the time of the refinancing. For example, if a minister with a $50,000 home mortgage debt refinances the indebtedness and increases it to $75,000, and if the additional $25,000 debt is used for personal expenses, then two-thirds of the interest payments could be allocated to the home and be included in computing the housing allowance exclusion, while one-third of the interest payments would be allocated to personal expenses and would not be included. Future rulings may provide further clarification.

In the past it was much harder for taxpayers to avoid tax on the gain from the sale of a home. As a result, ministers often attempted to minimize or avoid taxes by having gain from the sale of a former home designated as a housing allowance and applied to the down payment on a new home. This practice is rarely used today because the tax code eliminates any tax on gain from a former home if the home was owned and occupied for at least two of the previous five years (gain may be partially excluded from tax even if the home was owned and occupied for less than two years). For married couples, up to $500,000 of gain is excluded (up to $250,000 for single persons).

Because of this liberal provision, the gain most ministers realize from the sale of a former home is not taxed. However, this is not always the case. For example, a minister may have owned and occupied a home for less than two of the previous five years, resulting in some of the gain from the sale of the home being taxable. In high-cost areas, some ministers may realize gain from the sale of a home that exceeds the $250,000/$500,000 exclusion limits. Can ministers minimize or avoid tax on the gain from the sale of a former home by having it designated as a housing allowance and applying it to the down payment on a new home? In the past, when the rules for excluding gain on the sale of a home were much more restrictive, several courts addressed this question. Those cases are still relevant today whenever ministers try to exclude gain from the sale of a former home by having it designated as a housing allowance. Consider the following precedent:

The Marine case (1967)

In 1967 the Tax Court addressed the question of whether a pastor can apply his housing allowance to housing expenses paid out of the gain from the sale of his former home. Marine v. Commissioner, 47 T.C. 609 (1967). A church’s board of trustees adopted the following resolution: “For the [current] year and thereafter unless modified, all payments to Pastor Fred are to be considered rental allowance unless the payments exceed $20,000.”

During the year, Pastor Fred received compensation of $13,500 from the church. In July he purchased a new home for $18,500. He made a cash deposit of $500 on the property at the time of signing the contract of sale. The balance was provided by a one-year mortgage loan of $18,000, which Pastor Fred received from a local bank. In August Pastor Fred sold his former home for $16,500. Of this amount, $15,000 was withheld from Pastor Fred at closing and paid over to his bank in partial satisfaction of the $18,000 mortgage loan. Pastor Fred paid an additional $3,000 in expenses associated with the ownership of his home (monthly mortgage payments, utilities, furnishings, insurance, and property taxes).

In preparing his federal income tax return for the year, Pastor Fred did not report any taxable income. He assumed that his entire salary of $13,500 was nontaxable since the church had designated this entire amount as a housing allowance and he incurred housing expenses well in excess of this amount. The IRS audited Pastor Fred and determined that the housing allowance could be applied only to the $3,000 that he paid out of his own funds for housing expenses. The IRS refused to allow Pastor Fred to apply his housing allowance to the $15,000 proceeds from the sale of his former home that was used to pay down the mortgage loan on his new home. Pastor Fred appealed to the Tax Court.

The Tax Court agreed with the IRS that Pastor Fred could only apply his housing allowance to the $3,000 of out-of-pocket housing expenses he incurred in 1963. The court noted that the tax code originally only allowed ministers to exclude from taxable income the annual rental value of a parsonage. In 1954 the code was amended to allow ministers to exclude the portion of their income designated by their employing church as a housing allowance, to the extent it is used to pay for housing expenses. The reason for the 1954 amendment, noted the court, was to eliminate the prior law’s discrimination against ministers who were not provided with a parsonage and who had to use their own income to provide a home. As a result, in enacting the 1954 code, “Congress not only continued to provide that the rental value of a house furnished to a minister would not be included in gross income, but also added a further provision that a rental allowance paid to a minister as part of his compensation was excludable from gross income to the extent used by him to rent or provide a home.” The court concluded:

Plainly, the purpose of the new provision was to equalize the situation between those ministers who received a house rent free and those who were given an allowance that was actually used to provide a home. There certainly does not appear to be any intention to place ministers of the second category in a favored position. Yet, if petitioner were to prevail here, his entire compensation for 1963 would escape taxation, a result that seems clearly contrary to the underlying purpose of the statute. And the words of the statute itself explicitly preclude that result, for it provides that the rental allowance is excludable from a minister’s gross income only “to the extent used by him to rent or provide a home.” The circumstance that petitioner’s entire compensation was artificially designated as a “rental allowance” pursuant to the statement signed by the board of trustees of the church cannot in fact convert into a rental allowance that which was plainly compensation for services, nor does it appear on this record that to the extent that the Commissioner refused to treat his compensation as an excludable rental allowance such compensation was actually “used by him to rent or provide a home.”

On the facts before us petitioner did not use his entire 1963 compensation of $13,474.83 to rent or provide a home. True, he purchased a new residence in 1963 at a price which exceeded that amount. But the great bulk of that price was paid out of the proceeds of sale of petitioner’s old residence.

The court’s decision in the Marine case was based squarely on the principles of discrimination and source of income. Each principle is addressed below.

Discrimination

The court concluded that allowing ministers who own their homes to have their entire salary designated as a housing allowance would violate the purpose of the 1954 tax code amendment that sought to achieve equality between ministers who live in parsonages and those who own or rent their home. If ministers could have all or most of their church compensation designated as a housing allowance, they would be in a better position than ministers who live in church-owned parsonages.

The IRS applied this reasoning in a 1971 ruling that imposed the fair rental value limit on the nontaxable amount of ministers’ housing allowances. Revenue Ruling 71-280. This ruling was repudiated by the Tax Court in a 2000 decision. Warren v. Commissioner, 114 T.C. 23 (2000). However, the IRS position was incorporated into the Clergy Housing Allowance Clarification Act of 2002 that was enacted by Congress and that reinstated the fair rental value limit as a matter of law (as noted above).

Source

The court concluded that Pastor Fred’s housing allowance could not be applied to proceeds from the sale of a home that he applied to the mortgage loan on his new home, since these proceeds were not compensation received for the performance of ministerial services. In other words, the source of funds used to pay for a minister’s housing expenses must be compensation earned by the minister in the exercise of ministry. This is a correct statement. The income tax regulations specify that ‘‘in order to qualify for the exclusion, the home or rental allowance must be provided as remuneration for services which are ordinarily the duties of a minister of the gospel.” Note that in the Marine case the $15,000 used to pay down the mortgage loan could be unequivocally traced to the proceeds from the sale of Pastor Fred’s former home because the sales proceeds were withheld from him at closing and paid directly to his bank to be applied to his mortgage loan. There was no question that the mortgage loan prepayment was paid out of the sales proceeds and not out of Pastor Fred’s church salary. Therefore, the housing allowance could not be applied to any of those proceeds.

But what if the sales proceeds had not been withheld from Pastor Fred at closing? What if they were paid to Pastor Fred directly, he deposited them in his bank account, and he later used some or all of them to make a large down payment on his new home or pay down the mortgage loan on a new home? In such a case there would be no way to trace the $15,000 to the proceeds from the sale of Pastor Fred’s former home. The proceeds and Pastor Fred’s church salary would be commingled, making it difficult, if not impossible, to determine the source of the funds used to pay down the mortgage loan. It would be just as reasonable to assume that the source of the mortgage loan prepayment was Pastor Fred’s housing allowance as the proceeds from the sale of his home. There are two important qualifications to this view, however.

Other income. This view assumes a source of income in addition to the housing allowance. If a pastor’s entire church compensation is designated as a housing allowance and the pastor has no other source of income (including a spouse’s income), then it would be impossible to claim that the entire housing allowance should be nontaxable, even if the pastor had expenses of that much or more. After all, what income did the pastor use for living expenses? However, when a pastor has income in addition to a church salary, it makes a larger housing allowance more defensible.

Matching expenses to income. Housing allowances are nontaxable in computing federal income taxes only to the extent they are used to pay for housing expenses. The income tax regulations specify that ‘‘a rental allowance must be included in the minister’s gross income in the taxable year in which it is received, to the extent that such allowance is not used by him during such taxable year to rent or otherwise provide a home.” Does this requirement mean there must be a strict matching of housing allowances with actual housing expenses?

To illustrate, what if Pastor Fred had sold his former home in January and used $15,000 of the proceeds to make a down payment on a new home on January 31? By January 31 Pastor Fred has received only one-twelfth of his housing allowance for the year ($1,125). Can he only apply this amount to his down payment, or may he include the housing allowances he receives for the entire year ($13,500)? In other words, are housing allowances compared with housing expenses on an annual basis, or must allowances be matched with expenses on an ongoing basis throughout the year?

The following arguments and precedent clearly demonstrate that any matching is done annually. Consider the following points:

Does this mean he cannot consider these expenses when computing the nontaxable portion of his housing allowance at the end of the year when he prepares his tax return? Neither the IRS nor any court has ever ruled that a housing allowance cannot be applied to housing expenses incurred in January (or any other month) prior to the receipt of a housing allowance of equal or greater value. The focus is on housing expenses incurred throughout the year and whether the housing allowance designated by the church for the year is sufficient to cover these expenses.

Many other examples could be given. For example, what about a minister who incurs remodeling expenses or repairs of several thousand dollars in January that far exceed the housing allowance distributed in that month? Again, neither the IRS nor any court has ever suggested that these expenses must be matched to the housing allowance actually paid in January. Common sense, then, indicates that strict matching of housing allowances and housing expenses is not required. Doing so would be far too impractical and would lead to absurd results. Instead, the focus is on housing expenses incurred throughout the year and on a minister’s church-designated housing allowance for the year.

Example:
A church designates $24,000 of Pastor T’s 2025 compensation as a housing allowance. Pastor T resigns from the church on June 30, 2025. At the time of Pastor T’s resignation, he had received half of his $24,000 housing allowance ($12,000) but had only incurred $10,000 in housing expenses. Can he apply the unused allowance ($2,000) to housing expenses incurred in the second half of the year, following his resignation? The preceding analysis suggests that he can. Also, note that the key consideration is that the $2,000 unused allowance represents compensation for ministerial services performed by Pastor T during his employment in the first half of the year. Section 1.107-1(c) of the income tax regulations specifies that “a rental allowance must be included in the minister’s gross income in the taxable year in which it is received, to the extent that such allowance is not used by him during such taxable year to rent or otherwise provide a home” (emphasis added). This language explicitly allows a housing allowance that constituted compensation for ministerial services to be excluded from a minister’s taxable income if used to pay housing expenses during the same year.

Revenue Ruling 71-280 (1971)

Four years after the Marine decision, the IRS ruled that the nontaxable portion of a housing allowance for ministers who own their homes can never exceed the fair rental value of the home. Revenue Ruling 71-280. The IRS based its ruling squarely on the Marine case. It concluded:

It is indicated in the Senate Report that Congress intended only to remove the discrimination in the existing law and did not intend to create a new discrimination in favor of another group by placing ministers who receive rental allowances in a better position than ministers who receive rent free homes. Consequently, a minister cannot exclude his entire compensation by the mere act of having it designated as a rental allowance. Marine v. Commissioner, 47 T.C. 609 (1967).

As a result, ministers who own their homes can only exclude housing expenses to the extent that they do not exceed either the church-designated allowance or the fair rental value of the home plus the cost of utilities. The fair rental value test was adopted by the IRS to eliminate any discrimination between ministers who live in parsonages and those who are purchasing a home. It was repudiated by the Tax Court in 2000. Warren v. Commissioner, 114 T.C. 23 (2000). However, it was later reinstated as an amendment to section 107 of the tax code by the Clergy Housing Allowance Clarification Act of 2002. See “The Clergy Housing Allowance Clarification Act of 2002” on page .

Example:
M is a retired minister who rents a home. In December 2024 she informed her denominational pension board that she wanted a lump-sum distribution from her account of $100,000 in 2025, and she wanted the entire distribution to be designated as a housing allowance. M uses the distribution as a down payment on a new home in July 2025. She pays her living expenses with Social Security benefits and investment income. Assume that the rental value of the new home is $12,000 for the months it is occupied by M in 2025. What is the nontaxable portion of M’s housing allowance? According to the Marine case, the nontaxable portion of the housing allowance would be limited to the rental value of the home for the months M occupied it in 2025 ($12,000). This is the same result dictated by Revenue Ruling 71-280, IRS Publication 517, and section 107 of the tax code as amended by the Clergy Housing Allowance Clarification Act of 2002.

Example:
A church board is considering the 2025 compensation package for Pastor N. It decides on total compensation of $60,000. Pastor N asks the board to designate this entire amount as a housing allowance. He informs the board that he will have ordinary housing expenses of $15,000 but that he also will be purchasing a new home in 2025 and plans to make a large down payment (with the sale proceeds from his prior residence) of $45,000. Pastor N’s spouse is employed as a college professor, and the couple plans on using her salary for living expenses in 2025. Pastor N later uses the entire $60,000 to pay for housing expenses in 2025. Assume that the rental value (including utilities) of the former and new homes, during the months Pastor N occupies them, is $12,000. What is the nontaxable portion of Pastor N’s housing allowance? Section 107 of the tax code, as amended by the Clergy Housing Allowance Clarification Act of 2002, limits the nontaxable portion of a housing allowance for ministers who own their home to the fair rental value of their home (furnished, plus utilities). As a result, the housing allowance is nontaxable only if it is used to pay for housing expenses and does not exceed the annual rental value of the home. In this case, this means that the nontaxable housing allowance is limited to $12,000 (fair rental value).

What if a church designates $10,000 of a minister’s 2025 compensation as a housing allowance based on reasonable estimates of the minister’s anticipated expenses, and the minister trades homes later in the year and incurs much greater housing expenses? Can the church amend its housing allowance designation?

While neither the IRS nor any court has addressed this question, it seems reasonable to conclude that the church can amend its housing allowance designation during the year if changed circumstances render the allowance inadequate. Any change would only operate prospectively.

Key Point: Churches can amend a housing allowance if the allowance proves to be too low. However, the amended allowance will only operate prospectively.

In the past, ministers who owned their homes and itemized their deductions were eligible to deduct mortgage interest and property taxes on Schedule A, even though such items were excluded as part of the housing allowance exclusion. This was the so-called double deduction. IRC 265.

The IRS audit guidelines for ministers state that even though a minister’s home mortgage interest and real estate taxes have been paid with money excluded from income as a housing allowance, he or she “may still claim itemized deductions for these items.”

Housing expenses paid directly by a church

Some churches pay part or all of a minister’s housing expenses directly. Can such payments be treated as a nontaxable housing allowance? It could be argued that by agreeing to pay for a minister’s housing expenses, a church is, in effect, designating a housing allowance (in advance) in the amount of the expenses it paid. But the Tax Court has reached the opposite conclusion. A minister received a weekly “living allowance” from his church. He kept no records reflecting how these allowances were spent. In addition, his church paid his housing expenses (including mortgage payments, utilities, and furnishings). The court ruled that the weekly allowances were taxable and could not be classified as a nontaxable housing allowance. It observed:

Based on this case, a church that pays a minister’s housing expenses directly should designate in advance the amount it pays as a housing allowance, in addition to any other housing allowance it declares.

Many churches do not limit housing allowances to a particular calendar year. For example, if a church intends to designate $12,000 of its senior pastor’s salary in 2025 as a housing allowance, its designation could state that the allowance is effective for calendar year 2025 and all future years unless otherwise provided. This clause may protect the pastor if the board neglects to designate an allowance prior to the beginning of a future year.

A church also would be wise to have a “safety net” designation to cover midyear changes in personnel, delayed designations, and other unexpected contingencies. To illustrate, such a designation could simply state that a specified percentage (e.g., 40 percent) of the compensation of all ministers on staff, regardless of when hired, is designated as a housing allowance for the current year and all future years unless otherwise specifically provided.

Such safety net designations should not be used as a substitute for annual housing allowance designations for each minister. They are simply a means of protecting ministers against inadvertent failures by the church board to designate a timely housing allowance.

In 2010 the United States Tax Court ruled that a minister could apply a housing allowance to expenses incurred in owning two homes. The court acknowledged that section 107 of the tax code, which contains the housing allowance exclusion, refers to a minister’s “home” in the singular, but it concluded that this did not limit the application of a housing allowance to only one home.

In 2012 a federal appeals court reversed the Tax Court’s opinion and limited the application of a minister’s housing allowance to expenses incurred in only one home (the principal residence). Driscoll v. Commissioner, 669 F.3d 1309 (11th Cir. 2012). The United States Supreme Court declined to review the case on appeal, leaving the appeals court’s ruling intact.

The appeals court conceded that the tax code states that singular terms also include their plural forms, but it noted that this rule did not apply if “the context indicates otherwise.” Therefore, the “singular includes the plural provision” should only apply if the context of the housing allowance reasonably supports such an application. The court concluded that it did not, for two reasons:

First, the word home is defined by the dictionary as “the house and grounds with their appurtenances habitually occupied by a family; one’s principal place of residence; domicile.” The court concluded that the word home according to this definition “has decidedly singular connotations.”

Second, the court concluded that the history of the parsonage and housing allowance exclusions provided additional context for the term home. It noted that congressional committee reports describing the parsonage and housing allowance exclusions consistently use singular expressions (“a dwelling house,” “a home,” and “the home”), demonstrating that Congress intended for the parsonage and housing allowance exclusions to apply to only one home.

The court stressed that income exclusions should be “narrowly construed,” and therefore, “we do not believe that this court should construe any ambiguity in [the tax code] to favor a more expansive reading of the parsonage allowance income exclusion.”

Many ministers own two homes. In many cases, this is due to the fact that the minister has accepted a call in another community, purchases a home in that community, but has not yet sold the prior home. In some cases the minister has not moved but decides to purchase a new home in the same community and is in the process of selling the former home. The Tax Court’s decision in the Driscoll case suggested that these ministers, at least in some cases, might be able to apply a housing allowance to the expenses of owning both homes. That option has been eliminated by the federal appeals court’s recent ruling.

Many churches have their pastors fill out a housing expense form each year that lists anticipated housing expenses for the following year. The church board uses this form to declare pastors’ housing allowances. It would be prudent to amend this form to clarify that it should only list expenses incurred in owning a principal residence, and not a second home.

Can a church designate some or all of a minister’s severance pay as a housing allowance? This question is addressed under “Severance pay” on page .

Retired ministers are eligible for a housing allowance exclusion if certain conditions are met. However, the surviving spouse of a deceased minister is not eligible for the exclusion unless he or she also is a minister who otherwise qualifies. See “Ministers’ Spouses” on page  and “Housing Allowances” on page  for details. IRS Publication 517 states: “If you are a retired minister, you exclude from your gross income the rental value of a home (plus utilities) furnished to you by your church as a part of your pay for past services, or the part of your pension that was designated as a rental allowance. However, a minister’s surviving spouse cannot exclude the rental value unless the rental value is for ministerial services he or she performs or performed.”

Many ministers move into a retirement home following their retirement from ministry. Two costs are often associated with such living arrangements: (1) a lump-sum entrance fee, and (2) monthly or annual maintenance fees. The IRS has ruled that a lump-sum entrance fee paid by a retired minister to gain admission to a retirement community cannot be prorated over several years and claimed as a housing expense in those years. It can only be treated as a housing expense in the year it is actually paid. IRS Letter Ruling 8348018 (1983); IRS Technical Advice Memorandum 8039007 (1980).

What about monthly or annual maintenance fees? Can a retired minister’s housing allowance (designated by a pension board) be applied to these fees? That depends. Section 107 of the tax code allows ministers to exclude from gross income the portion of their compensation designated in advance as a housing allowance, to the extent the allowance is used to “rent or provide a home.” The regulations define this language as follows: “Circumstances under which a rental allowance will be deemed to have been used to rent or provide a home will include cases in which the allowance is expended (1) for rent of a home, (2) for purchase of a home, and (3) for expenses directly related to providing a home. Expenses for food and servants are not considered for this purpose to be directly related to providing a home.”

As a result, a retired minister’s housing allowance can be applied to any portion of a monthly maintenance fee charged by a retirement home that is “an expense directly related to providing a home.” The regulations prohibit housing allowances from being applied to the costs of “food and servants”; therefore, a housing allowance could not be applied to any portion of a maintenance fee that goes to food or housekeeping expenses.

Traveling evangelists are entitled to a housing allowance exclusion if they maintain a permanent home and have local churches in which they conduct religious meetings declare in advance a portion of their compensation as a housing allowance. See Revenue Ruling 64-326. The requirement that each church designate a portion of an evangelist’s compensation as a housing allowance is certainly an inconvenience, but it is well worth it. The Tax Court has rejected the contention of one evangelist that such a requirement impermissibly discriminates against evangelists. Warnke v. Commissioner, 641 F. Supp. 1083 (D.C. Ky. 1986).

Some evangelists have created nonprofit corporations. One of the justifications sometimes given for this procedure is to enable the evangelist to avoid the inconvenience of having each church designate a portion of his or her compensation as a housing or rental allowance—the idea being that the corporation can designate a portion of the evangelist’s annual income as a housing allowance in a single action. See Chapter 3 for a discussion of which organizations can designate housing allowances.

Other evangelists have churches designate all their compensation as a housing allowance during the first months of the year and then do not bother with allowances for the last several months of the year. A potential problem with this arrangement is that if evangelists have churches designate their entire compensation as a housing allowance, there will be no taxable income to report on a Form 1099-NEC, and an evangelist theoretically could avoid the reporting of any income.

To ensure accountability, it is recommended that churches issue evangelists and other guest speakers a Form 1099-NEC if paying them compensation (net of substantiated travel expenses) of $600 or more. Include a housing allowance designated by the church in computing the $600 amount, but also provide the evangelist or guest speaker with a written housing allowance designation on the church’s stationery to confirm the housing allowance amount.

Ministers cannot exclude a housing allowance (or the annual fair rental value of a parsonage) when computing their self-employment (Social Security) taxes unless they are retired. The tax code specifies that the self-employment tax does not apply to “the rental value of any parsonage or any parsonage allowance provided after the [minister] retires.” IRC 1402(a)(8).

The IRS Tax Guide for Churches and Religious Organizations states: “The fair rental value of a parsonage or housing allowance is excludable from income only for income tax purposes. These amounts are not excluded in determining the minister’s net earnings from self-employment for Self-employment Contributions Act (SECA) tax purposes. Retired ministers who receive either a parsonage or housing allowance are not required to include such amounts for SECA tax purposes.”

Therefore, in computing the Social Security tax on Schedule SE of Form 1040, nonretired ministers must include the actual housing allowance exclusion as income on line 2 of either the short or long Schedule SE (whichever applies). IRC 1402(a)(8); Treas. Reg. 1.1402(a)-11(a); Flowers v. Commissioner, T.C. Memo. 1991-542.

A United States Tax Court ruling in 1964 limited the deductibility of some business and professional expenses for ministers who excluded a portion of their church compensation from gross income as a housing or rental allowance. Deason v. Commissioner, 41 T.C. 465 (1964). However, this ruling ceased to have significance after Congress abolished any deduction for unreimbursed and nonaccountable reimbursed business expenses after 2017 and before 2026.

In 2002 Congress enacted the Corporate and Auditing Accountability, Responsibility and Transparency Act, more commonly known as the “Sarbanes–Oxley Act.” The Act was designed to restore investor confidence in the financial markets by holding companies issuing stock to much higher standards than previously done.

Most of the Act’s provisions are amendments to the two main federal securities laws, the Securities Act of 1933 and the Securities Exchange Act of 1934. Churches are specifically exempted from these laws except for the antifraud provisions; so churches generally are not subject to most of the provisions of Sarbanes–Oxley.

A few provisions of the Act are not amendments to federal securities law but instead are amendments to federal criminal law. Since no blanket exemption for churches is granted under federal criminal law, churches are subject to these provisions. One of these provisions amends federal criminal law to include the following new crime:

Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States . . . ​or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.

A number of requirements must be met in order to trigger liability for the destruction or falsification of documents:

Example:
A church has 50 members and one full-time employee (its pastor). It also has a part-time office secretary and an independent contractor who performs custodial services. The pastor discovers in November 2025 that the church board failed to designate a housing allowance for him for that year. He prepares a document that he dates December 31, 2024, and that purports to designate a housing allowance for all of 2025.

The church is not a public company and therefore is not subject to most of the provisions of the Sarbanes–Oxley Act. However, the Act makes it a crime to knowingly falsify any document with the intent to influence “the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States . . . ​or in relation to or contemplation of any such matter or case,” and this provision contains no exemption for churches or pastors. It is possible that the pastor’s falsification of the 2025 housing allowance violates this provision in the Sarbanes–Oxley Act, exposing him to a fine or imprisonment of up to 20 years. The Act does not define the “proper administration of any matter within the jurisdiction of any department or agency of the United States . . . ​or in relation to or contemplation of any such matter,” but several courts have construed this same language in other contexts and noted that it “must be given a broad, nontechnical meaning” and that it pertains generally to “all matters within the authority of a government agency” and is not limited to submissions of written documents to governmental agencies. These factors raise the possibility that the pastor’s actions violate Sarbanes–Oxley. But even if they do not, the pastor’s actions may expose him to civil or criminal penalties under the tax code.

The following examples address the significant issues associated with the housing allowance exclusion.

Construction costs

Example:
Pastor B owns a home. In February 2025 he begins building a new home in the same community. Pastor B sells his home in June 2025 and moves into the new home on July 1. Can he include the construction costs from February to July in computing his housing allowance exclusion for 2025, in addition to the costs of maintaining his prior home?

The regulations interpreting section 107 of the tax code specify that “for purposes of section 107, the term ‘home’ means a dwelling place.” The IRS and a federal appeals court have both ruled that a minister has only one “home”—his or her principal residence—and so no expenses incurred in constructing a new home can be counted in computing the housing allowance exclusion until it has become the minister’s “dwelling place.” Driscoll v. Commissioner, 669 F.3d 1309 (11th Cir. 2012), addressed under “Owning two homes” on page ; Revenue Ruling 72-588.

What about ministers who are building a home while living in a church-owned parsonage? The construction costs would not be excludable as a housing allowance until the minister moves into the home, and so these ministers may want to consider deferring as many of the construction costs as possible to the time when they will be occupying the new home.

Example:
A minister spent a portion of his church-designated housing allowance to purchase and install new floors, new carpet, and new cabinets in his home. The IRS ruled that a housing allowance can be used to pay for “capital expenditures” for remodeling. IRS Letter Ruling 8350005.

Down payments

Example:
Pastor G, an ordained minister, purchased a home in 2024 for $100,000. During 2024 he made a $15,000 down payment on the home and, in addition, paid $8,000 in principal and interest payments on his home loan, $3,000 for utilities, $1,000 for home furnishings, $750 for repairs, $500 for real property taxes, and $200 for homeowners insurance. Pastor G has receipts for all of these expenses. His church designated $15,000 of his salary of $35,000 as a housing allowance. The annual rental value of the home (including furnishings) is determined by a local real estate agent to be $17,000. Pastor G’s housing allowance exclusion would be the lowest of the following three amounts: (1) actual expenses ($28,450); (2) the church-designated housing allowance ($15,000); or (3) the annual rental value of the home, including utilities ($17,000). The lowest of these three amounts is the housing allowance of $15,000, meaning that the entire allowance is excluded from income taxation.

This example illustrates the adverse tax impact of a church designating an allowance that is too low. In this case the church’s low designation will have the effect of forcing Pastor G to unnecessarily include an additional $2,000 in gross income for 2024. Assuming that he is in the 15-percent tax bracket, this amounts to an additional tax liability of $300. The lesson is clear—churches should not designate an allowance for a home-owning minister that is less than estimated housing expenses or the rental value of the minister’s home (furnished, including utilities).

Housing allowance designations

Example:
A church board adopts the following resolution: “The board authorizes a housing allowance for each member of the pastoral staff in the amount of their actual and substantiated housing expenses.” This method of designating a housing allowance should be avoided since the IRS and the courts may not consider this to be an advance designation of a portion of a minister’s compensation as a housing allowance, as required by law. The church will not know the amount of the housing allowance until the end of the year. Therefore, it seems doubtful that this would satisfy the advance designation requirement. It is not enough to agree in principle to pay a minister a housing allowance, leaving to the future a determination of the amount of the allowance. A specific amount of a minister’s compensation must be designated as a housing allowance.

Example:
A religious denomination seeks to relieve local churches of the burden of designating annual housing allowances for their ministers and accordingly makes a designation for all ministers ordained by the denomination. This general designation is not effective with respect to ministers of local churches, but it is effective with respect to minister-employees of the denomination. Revenue Ruling 62-117; Revenue Ruling 75-22.

EXAMPLE The Tax Court ruled that a “federation” of churches that supervised a police chaplain (who was an ordained minister) could designate a portion of his salary as a housing allowance even though his salary was paid by the police department. Boyd v. Commissioner, 42 T.C.M. 1136 (1981).

Example:
The IRS ruled that a regional denominational executive could not designate a portion of a state prison chaplain’s salary as a housing allowance. The chaplain was an ordained minister with the Christian Church (Disciples of Christ). He excluded 45 percent of his wages as a housing allowance based on a letter from a regional executive of the Christian Church, which “endorsed” his ministry and stated that 45 percent of his annual salary constituted a housing allowance.

The IRS noted that the income tax regulations specify that housing allowances must be declared “by the employing church or other qualified organization.” The IRS concluded that the Christian Church was not actively involved in the day-to-day conduct of the state prison chaplain program. Its involvement was limited to sending a letter to the state endorsing the chaplain and receiving annual reports from him. It also concluded that “we do not believe that this level of involvement is sufficient . . . ​to qualify the Church as an ‘other qualified organization’. . . . ​The Church is not closely involved with the state in the conduct of its chaplain program and the responsibilities of the Church are not like those of an employer.” Accordingly, neither the Christian Church nor any of its executives could designate a housing allowance for the prison chaplain. The IRS disallowed the chaplain’s exclusion of 45 percent of his salary as a housing allowance. IRS Letter Ruling 9052001.

Housing expenses that exceed a minister’s housing allowance

Example:
Pastor D owns his home. His employing church designated $8,000 of his $35,000 compensation in 2024 as a housing allowance. Pastor D’s housing expenses for 2024 were utilities of $3,500, mortgage payments of $6,200, property taxes of $2,000, insurance payments of $500, repairs of $1,000, and furnishings of $750. The annual rental value of the home (including furnishings) is $7,500. Pastor D’s housing allowance exclusion would be the lowest of the following three amounts: (1) actual expenses ($13,950), (2) the church-designated housing allowance ($8,000), or (3) the annual rental value of the home, furnished, including utilities ($11,000). The nontaxable amount of the housing allowance would be limited to $8,000 since it is the lowest of the three amounts.

Ministers who own their home debt-free

Example:
Pastor C is paid a salary of $35,000 for 2024 plus a housing allowance of $15,000. Pastor C has housing expenses of $15,000, consisting of mortgage payments on a conventional home loan of $10,000, utilities of $3,500, and property taxes and insurance of $1,500. The fair rental value of the home is $16,000 (furnished, plus utilities). Pastor C can claim the full church-designated housing allowance as an exclusion from taxable income for income tax reporting since he has housing-related expenses of at least this amount (and his expenses do not exceed the fair rental value of the home).

Example:
Same facts as the previous example, except that Pastor C pays off his home mortgage loan. Pastor C is still eligible for a housing allowance, but it is excludable only to the extent of his actual housing-related expenses of $5,000. As a result, $10,000 of the housing allowance represents taxable income.

Purchasing a parsonage from the church

Example:
A church owned a home that it sold to its senior minister, Pastor D. The sales price was the home’s fair market value at the time of the sale. Pastor D signed a promissory note and land contract agreeing to make monthly payments over a number of years until the sales price was paid in full. Title to the home remained in the name of the church until the note was paid in full. Under a “compensation agreement” adopted by the church, Pastor D was paid a salary (a portion of which was designated as a housing allowance by the church). The church also paid all of Pastor D’s utility expenses. Principal and interest payments made by Pastor D to the church are properly included in computing his housing allowance exclusion, and he may also deduct the interest payments as an itemized deduction on Schedule A (if he is able to itemize deductions). IRS Letter Ruling 8937025.

Renting a home

Example:
Pastor R rents a home. His church designated a rental allowance of $7,500 for 2024. Pastor R’s actual expenses incurred in renting the home (he has receipts for all of them) are $8,200. The annual rental value of the home (including furnishings and utilities) is $10,000. The housing allowance of a minister who rents a home is the least of the following amounts: (1) actual expenses incurred in renting the home, (2) the church-designated allowance, or (3) the fair rental value of the home (furnished, plus utilities). Pastor R’s housing allowance exclusion for 2024 will be $7,500 (the least of these three amounts).

Second mortgages and home equity loans

Example:
Pastor C is paid a salary of $30,000 for 2025 plus a housing allowance of $10,000. Pastor C has housing expenses of $10,000 in 2025, consisting of mortgage payments on a conventional home loan of $6,000, utilities of $2,500, and property taxes and insurance of $1,500. The fair rental value of the home is $11,000. Pastor C can claim the full church-designated housing allowance as an exclusion from taxable income when computing income taxes for 2025 since he had housing-related expenses of at least this amount (and his expenses do not exceed the fair rental value of the home).

Example:
Same facts as the previous example, except that Pastor C paid off his home mortgage loan at the end of 2011. Pastor C is eligible for a housing allowance in 2025, but it is nontaxable only to the extent of his actual housing-related expenses of $4,000. As a result, $6,000 of the $10,000 housing allowance represents taxable income.

Example:
Same facts as the previous example, except that Pastor C obtains a loan, secured by a mortgage on his home, to pay for various personal expenses (a car, a vacation, a child’s college education, and various medical bills). The loan payments amount to $6,000 in 2025. Pastor C cannot include any portion of the $6,000 in computing his housing allowance exclusion for the year, since these are not an expense of providing a home. Pastor C’s housing allowance exclusion (the amount by which he can reduce his taxable income) is $4,000 (utilities, property taxes, and insurance). The excess housing allowance of $6,000 must be reported as taxable income.

Example:
Same facts as the previous example, except that Pastor C obtains a loan, secured by a mortgage on his home, to pay for remodeling expenses and furnishings. The full amount of these loan payments can be considered housing-related expenses in computing the nontaxable portion of Pastor C’s housing allowance for the year.

The IRS has issued audit guidelines for its agents to follow when auditing ministers. The guidelines provide agents with the following information regarding housing allowances:

Illustration 6-3:

A housing allowance must be included in the minister’s gross income in the taxable year in which it is received to the extent that such allowance is not used by him during the taxable year to rent or otherwise provide a home or exceeds the FRV of the home including furnishings and appurtenances such as a garage and the cost of utilities. The value of the “allowed” parsonage allowance is not included in computing the minister’s income subject to income tax and should not be included in W-2 wages. However, the parsonage allowance is subject to self-employment tax along with other earnings. (See special rules for retired ministers). . . .

The exclusion under section 107 only applies if the employing church designates the amount of the parsonage allowance in advance of the tax year. The designation may appear in the minister’s employment contract, the church minutes, the church budget, or any other document indicating official action. . . .

The amount of the parsonage allowance excludible from gross income is the LEAST of:

The IRS audit guidelines contain the following examples:

Example 1:
A is an ordained minister. She receives an annual salary of $36,000 and use of a parsonage which has an FRV of $800 a month, including utilities. She has an accountable plan for other business expenses such as travel. A’s gross income for arriving at taxable income for federal income tax purposes is $36,000, but for self-employment tax purposes it is $45,600 ($36,000 salary + $9,600 FRV of parsonage).

Example 2:
B, an ordained minister, is vice president of academic affairs at Holy Bible Seminary. His compensation package includes a salary of $80,000 per year and a $30,000 housing allowance. His housing costs for the year included mortgage payments of $15,000, utilities of $3,000, and $3,600 for home maintenance and new furniture. The fair rental value of the home, as furnished, is $18,000 per year. The three amounts for comparison are:

B may exclude $21,000 from gross income but must include in income the other $9,000 of the housing allowance. The entire $30,000 will be considered in arriving at net self-employment income.

Example 3:
C is an ordained minister and has been in his church’s employ for the last 20 years. His salary is $40,000, and his designated parsonage allowance is $15,000. C’s mortgage was paid off last year. During the tax year, he spent $2,000 on utilities and $3,000 on real estate taxes and insurance. The FRV of his home, as furnished, is $750 a month. 

The three amounts for comparison are:

C may only exclude his actual expenses of $5,000 for federal income tax purposes. He may not exclude the FRV of his home even though he has paid for it in previous years. Swaggart v. Commissioner, T.C. Memo. 1984-409. The $15,000 will be included in the computation of net self-employment income.

Example 4:
Assume the same facts as in Example 3, except that C takes out a home equity loan and uses the proceeds to pay for his daughter’s college tuition. The payments are $300 per month. Even though he has a loan secured by his home, the money was not used to “provide a home” and can’t be used to compute the excludable portion of the parsonage allowance. The results are the same as for Example 3. The interest on the home equity loan may be deducted as an itemized deduction subject to the limitations, if any, of Internal Revenue Code section 163.

Example 5:
D is an ordained minister who received $40,000 in salary plus a designated housing allowance of $12,000. He spent $12,000 on mortgage payments, $2,400 on utilities, and $2,000 on new furniture. The FRV of his home as furnished is $16,000. D’s exclusion is limited to $12,000 even though his actual cost ($16,400) and FRV and utilities ($18,400) are more. He may not deduct his housing costs in excess of the designated allowance.

Example 6:
E’s designated housing allowance is $20,000. She and her husband live in one half of a duplex that they own. The other half is rented. Mortgage payments for the duplex are $1,500 per month. E’s utilities run $1,800 per year, and her tenant pays his own from a separate meter. During the year E replaced carpeting throughout the structure at a cost of $6,500 and did minor repairs of $500. E must allocate her mortgage costs, carpeting, and repairs between her own unit and the rental unit in determining the amount of the excludable parsonage allowance. Amounts allocable to the rented portion for mortgage interest, taxes, etc., would be reported on Schedule E as usual. Her actual costs to provide a home were $14,300 ($9,000 mortgage payments, $1,800 utilities, and $3,500 for half the carpeting and repairs). The FRV for her unit is the same as the rent she charges for the other half, which is $750 a month, and she estimates that her furnishings add another $150 per month to the FRV. Her FRV plus utilities is $12,600 ($10,800 FRV + $1,800 utilities). E may exclude $12,600 for federal income tax purposes.

Pursuant to Internal Revenue Code section 265(a)(6) and Rev. Rul. 87-32, even though a minister’s home mortgage interest and real estate taxes have been paid with money excluded from income as a housing allowance, he or she may still claim itemized deductions for these items. The sale of the residence is treated the same as that of other taxpayers, even though it may have been completely purchased with funds excluded under Internal Revenue Code section 107.

Because expenses attributable to earned income that is exempt from tax are not ordinarily deductible, a minister’s business expenses related to his or her earnings must be allocated and become partially nondeductible pursuant to IRC § 265. This is discussed in detail in the section on Business Expenses.

Illustration 6-3 provides a worksheet for the computation of the amount that is excludable as a [housing] allowance.

In March 2019, a federal appeals court rejected an atheist group’s challenge to the constitutionality of the housing allowance. The atheist group did not appeal this ruling. This historic ruling is addressed at the beginning of this chapter.

Churches and ministers can report housing allowances for federal income tax purposes in various ways. Three methods are described below (for use in 2025), along with the advantages and disadvantages of each. Churches and ministers should select the method that works best for them.

Method 1: The actual exclusion method

Few churches use this method. It consists of the following steps:

As a minister who owns a home, you do not pay federal income taxes on the amount of your compensation that the church designates in advance as a housing allowance to the extent that the allowance represents compensation for ministerial services, is used to pay housing expenses, and does not exceed the fair rental value of your home (furnished, plus utilities). To assist the church in designating an appropriate housing allowance, please estimate on this form the housing expenses you expect to pay next year, and then return the form to the secretary of the church board prior to the board’s December meeting. 

The above listed expenses represent a reasonable estimate of my housing expenses for next year. I understand and agree that

[Note: Include paragraph 4 only if the church uses the “actual exclusion” method for reporting housing allowances, as described above. If the church uses the “estimated exclusion” or “nonaccountable” methods, delete paragraph 4 and renumber paragraph 5 as paragraph 4.]

Legible signature of minister

Date

I attest that I received this form on Date

Secretary of church board

Illustration 6-5: Housing allowance expense report form for ministers who rent their home

As a minister who rents a home or apartment, you do not pay federal income taxes on the amount of your compensation that the church designates in advance as a housing allowance to the extent that the allowance represents compensation for ministerial services, is used to pay rental expenses, and does not exceed the fair rental value of the home (furnished, plus utilities). To assist the church in designating an appropriate amount, please estimate on this form the rental expenses you expect to pay next year, and then return the form to the secretary of the church board prior to the board’s December meeting.

The above listed expenses represent a reasonable estimate of my housing expenses for next year. I understand and agree that

[Note: Include paragraph 4 only if the church uses the “actual exclusion” method for reporting housing allowances, as described above. If the church uses the “estimated exclusion” or “nonaccountable” methods, delete paragraph 4 and renumber paragraph 5 as paragraph 4.]

Legible signature of minister

Date

I attest that I received this form on Date

Secretary of church board

Illustration 6-6: Parsonage allowance expense form for ministers who live in a church-owned parsonage

As a minister who lives in a church-provided parsonage, you do not pay federal income taxes on the amount of your compensation that the church designates in advance as a parsonage allowance to the extent that the allowance represents compensation for ministerial services, is used to pay parsonage expenses, and does not exceed the fair rental value of the parsonage (furnished, including utilities). To assist the church in designating an appropriate amount, please estimate on this form the parsonage expenses you expect to pay next year, and then return the form to the secretary of the church board prior to the board’s December meeting.

The above listed expenses represent a reasonable estimate of my parsonage expenses for next year. I understand and agree that

[Note: Include paragraph 4 only if the church uses the “actual exclusion” method for reporting housing allowances, as described above. If the church uses the “estimated exclusion” or “nonaccountable” methods, delete paragraph 4 and renumber paragraph 5 as paragraph 4.]

Legible signature of minister

Date

I attest that I received this form on Date

Secretary of church board

Church designates a housing allowance. The church board, in its December 2024 meeting, designates a portion of the minister’s 2025 compensation as a housing allowance, based on the minister’s estimated expenses (see Illustration 6-2).

Advantages

Disadvantages

Method 2: The estimated exclusion method

This is a commonly used method consisting of the following steps:

Advantages

Disadvantages

Method 3: The nonaccountable method

This method is not commonly used. It consists of the following steps:

Advantages

There are no advantages in using this method other than the fact that it may be slightly easier for the minister (who is not required to estimate housing expenses for the following year).

Disadvantages