Clergy – Part 3


How much of a minister's compensation can a church designate as a housing allowance? That was the issue presented to the IRS in a private letter ruling request. The IRS, relying on a ruling it issued in 1971, concluded that a minister's housing allowance exclusion may never exceed the fair rental value of his or her home (furnished, including utilities), regardless of how much of the minister's compensation the employing church has designated as a housing allowance. Rev. Rul. 71-280. That is, a church can declare any portion of a minister's compensation as a housing allowance, but this will be "ineffectual" since the amount of the allowance that is excludable may never exceed the fair rental value of the home (furnished, including utilities). In explaining this "ceiling," the IRS observed that "Congress only intended to grant an exclusion to an amount received in lieu of a home in kind." In other words, a minister who receives a housing allowance should be no better off than a minister who is provided an identical home as a rent-free parsonage. Since the minister living in a parsonage cannot exclude more than the fair rental value of the parsonage, a minister who owns a home should not be placed in a "better position" by being given a housing allowance in excess of the fair rental value of the home. While this logic is questionable, it clearly represents the IRS official position. Of course, the amount of a minister's housing allowance that can be excluded from gross income (for income tax purposes) can never exceed actual expenses incurred in acquiring or maintaining the home. Accordingly, the actual amount that can be excluded from gross income is the least of the following three amounts: (1) the church-designated allowance, (2) actual housing expenses, or (3) the fair rental value of the home (furnished, including utilities). There is nothing to be gained by designating a homeowning minister's entire compensation as a housing allowance, unless such amount is clearly less than actual housing expenses or the fair rental value of the home. Private Letter Ruling 8825025.

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