Ministers who live in church-owned parsonages are denied one very important benefit of home ownership: the opportunity to accumulate equity in a home over the course of many years.
Many ministers who have lived in parsonages during much of their active ministry often face retirement without housing. Their fellow ministers who purchased a home early in their ministries can often look forward to retirement with a home that is either substantially or completely debt free. To avoid the potential hardship often suffered by a minister who lives in a parsonage, some churches increase their minister’s compensation by an amount that is sometimes referred to as an equity allowance. The idea is to provide the minister with the equivalent of equity in a home. This is an excellent idea that should be considered by any church having one or more ministers living in church-provided housing. Of course, for the concept to work properly, the equity allowance should not be accessible by the minister until retirement. Therefore, some churches choose to place the allowance directly in a minister’s tax-sheltered retirement account.
RECOMMENDATION Equity allowances should also be considered by a church whose minister rents a home.
CAUTION Some churches attempt to rectify the lack of home equity by giving the parsonage to the minister upon retirement. This solution may provide a home for the pastor, but it creates a significant tax burden, since the value of the home must be included in the pastor’s income at the time of the transfer. The transaction may also create unreasonable compensation and result in intermediate sanctions to the minister and the church’s decision-makers.
For comprehensive tax information about equity allowances, see the “Equity Allowances” section in chapter 6 of the Church & Clergy Tax Guide.