Our pastor will soon retire after 30 years of service to our church. The pastor and his wife have resided in our church parsonage for all of these years, and the church board would like to sell the parsonage to the pastor at half of its market value as a retirement gift in recognition of his services.
Some board members believe that the difference between the market value of the parsonage and the sales price must be reported as taxable income by the church on the pastor’s W-2, but others disagree. How should we handle this?
If a church allows an employee to buy church property at less than fair market value, the employee ordinarily realizes taxable income in the amount by which the property’s fair market value exceeds the bargain sale price. Treas. Reg. 1.61-2(d)(2). This assumes that the property is owned by the church debt-free, or that the church remains responsible for any indebtedness.
Before making a bargain sale of church property to an employee, a church must also consider whether the employee’s total compensation is unreasonable in amount. If it is, this may constitute prohibited inurement of a church asset to the personal benefit of a private individual in violation of one of the conditions for tax-exempt status listed in section 501(c)(3) of the tax code.
Such a sale also may expose the retired minister and members of the church board to substantial excise taxes known as “intermediate sanctions
.” For these reasons, be sure to check with a tax professional before approving a bargain sale of church property to a church employee.
Adapted from the Church & Clergy Tax Guide.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.