Q: Our pastor lives in a church-owned parsonage. We designate a small part of his compensation each year as a parsonage allowance that he uses to pay the minimal expenses he incurs living in the parsonage. Last year he bought a home. He has asked our church board to designate a sizable portion of his salary as a housing allowance to pay for the expenses he incurs in owning this home. Can our church designate a housing allowance for him?
A: Several pastors who live in a church-provided parsonage have taken advantage of historically low housing prices to acquire a permanent home for use after they retire. But can pastors who live in a parsonage provided by their church take advantage of the housing allowance exclusion for expenses incurred in a home they have purchased for future use?
Unfortunately, the answer is no. 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, include furnishings and appurtenances such as a garage, plus the cost of utilities."