Q&A: Making Improvements to Pastor-Owned Property

Can we build an outdoor gazebo for the church’s use on the pastor’s property?

Our church wants to build a gazebo to accommodate outdoor weddings and events. The cost with foundation and landscaping will be about $20,000. Currently, our church property cannot accommodate the gazebo, but the pastor’s property next door has more than enough room. Historically, we have used the pastor’s property and the property next to it (owned by members) for picnics and other events for some 25 years. We have been advised that we can erect the gazebo with landscaping using church funds as long as we have a written agreement with the pastor for use of it as long as he owns the property. We are not worried about losing use of the gazebo because this is the founding pastor’s property. However, we want to make absolutely sure that we can legally do this. And if so, what must we do to insure that it is never a problem for the church or the paid pastor? Is this considered income to that pastor when the church is the primary user?
From the church’s perspective, all assets and resources must be used exclusively for exempt purposes. So the church may only build the gazebo if will be used exclusively for church purposes or if it chooses to award a bonus to its pastor in the amount of the value of the gazebo. If the church chooses the bonus route, then the amount must never cause the pastor’s compensation to exceed a reasonable amount. If the church chooses building route, it must exclusively lease the gazebo for the useful life of the gazebo. This means that the property needs to be partitioned into two parts so that the church may lease the land where the gazebo will be located. The church will execute a ground lease on the partitioned portion. The pastor may or may not receive any rent from the lease. The lease will also prohibit the pastor from using the partitioned land during the life of the lease.
If the church builds a gazebo on land owned by the pastor without the partition described above, then the pastor receives taxable income (computed by adding the value of the gazebo to his other taxable income). while the church may execute a shorter term lease for the gazebo, the shorter term lease does not change the tax consequences to the pastor, especially because he was the founding pastor.
Richard Hammar covers additional property-related issues in Pastor, Church & Law.
Frank Sommerville is a both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.

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