Ministers who live in church-owned parsonages often miss out on a critical benefit of home ownership: the ability to accumulate equity in a home over the years. Without this equity, many pastors face significant financial challenges during retirement.
Understanding the Challenge of Parsonage Living
Many ministers who have spent most of their active ministry living in parsonages retire without housing. In contrast, pastors who purchased homes earlier in their careers often retire with homes that are either substantially or completely paid off.
For comprehensive tax information about equity allowances, see the equity allowances section in chapter 6 of the 2025 “Church & Clergy Tax Guide.“
Equity Allowances: A Practical Solution
To address this issue, some churches increase their minister’s compensation by providing an equity allowance. This allowance can offer pastors a similar financial benefit to building home equity. Key considerations include:
- The equity allowance should not be accessible by the minister until retirement.
- Many churches choose to deposit the allowance directly into a tax-sheltered retirement account.
Recommendation: Equity allowances should also be considered for pastors who rent their homes.
Potential Pitfalls of Gifting the Parsonage
Some churches attempt to address the lack of home equity by transferring ownership of the parsonage to the minister upon retirement. However, this approach can create several problems:
- The value of the home is taxable income, leading to a significant tax burden for the pastor.
- The transaction may create unreasonable compensation and result in intermediate sanctions for both the church and its decision-makers.
For More Information
FAQs About Home Equity for Pastors
What is a parsonage?
A parsonage is a home provided by a church for its minister to live in while serving the congregation.
What is an equity allowance?
An equity allowance is additional compensation provided to pastors to help them build financial security similar to home equity.
How can equity allowances benefit pastors?
Equity allowances allow pastors to accumulate retirement savings that can help with housing costs after they retire.
What are the tax implications of transferring a parsonage?
Transferring a parsonage to a pastor as a retirement gift can result in a significant tax burden, as the value of the home must be reported as taxable income.
Conclusion
Churches can help their pastors build financial security by implementing equity allowances. This proactive approach can prevent housing-related challenges during retirement and demonstrate care for the long-term well-being of ministers.
