The housing allowance is one of the most important tax benefits available to ministers. However, many ministers don’t fully benefit from it—often because they, their tax advisers, or church boards aren’t familiar with the rules.
Understanding the tax treatment of different housing situations can help ministers maximize this benefit.
Common Housing Arrangements for Ministers
Ministers typically fall into one of three housing situations:
- Owning a home
- Renting a home or apartment
- Living in a church-provided parsonage
Each arrangement comes with specific tax advantages. Here’s a breakdown.
Ministers Who Own Their Home
Ministers who own their home can exclude from federal income tax the portion of their church-designated compensation used for housing—if the following conditions are met:
- The allowance is designated in advance by the church.
- It is used to pay housing-related expenses.
- It does not exceed the home’s fair rental value (furnished, plus utilities).
Qualifying expenses include:
- Mortgage payments
- Utilities
- Repairs and maintenance
- Furnishings
- Property taxes and insurance
- Additions and improvements
Ministers Who Rent
Ministers who rent a home or apartment receive a similar benefit. They can exclude from federal income tax the amount of compensation designated as a housing allowance, provided that:
- The allowance is designated in advance.
- It is used for rental expenses.
- It does not exceed the fair rental value of the home (furnished, plus utilities).
Ministers Living in a Church-Owned Parsonage
Ministers who live in a church-provided parsonage enjoy two key benefits:
- No federal income tax is owed on the fair rental value of the parsonage.
- This amount is not reported as income on Form 1040.
- Ministers may also exclude from federal income tax a parsonage allowance, designated in advance, that covers out-of-pocket housing-related expenses (e.g., utilities, repairs, furnishings).
Setting Housing and Parsonage Allowances
To qualify, housing or parsonage allowances must be:
- Designated in writing
- Approved in advance of the calendar year
- Adopted by the church board or congregation
Note: If a church misses the deadline, it should still make the designation as soon as possible in the new year. However, it will only apply prospectively.
Important consideration:
The nontaxable portion of the allowance cannot exceed the fair rental value of the home (furnished, plus utilities). There’s no benefit to designating an amount beyond this limit.
Using “Safety Nets”
Some churches include language in their allowance designations to guard against oversights. These “safety net” clauses can be helpful in situations such as:
- The board forgets to reauthorize the allowance for a future year.
- A new minister is hired midyear.
- There’s a delay in formal board action.
Example safety net language:
- “This housing allowance is effective for calendar year 2025 and all future years unless otherwise provided.”
- “40% of each minister’s compensation is designated as a housing allowance for the current year and all future years unless specifically modified.”
Important: Safety nets are not a substitute for annual, individualized designations. They are a backup—not a replacement.
Key Details Ministers Should Know
Here’s a quick-reference summary of essential rules and reminders:
- Housing allowances must be designated in advance. Retroactive designations are not valid.
- The nontaxable amount is limited to the lesser of:
- The designated allowance,
- Actual housing expenses, or
- The home’s fair rental value (furnished, plus utilities).
- Allowances can be amended during the year, but only take effect prospectively.
- Any excess allowance must be reported on Form 1040, Line 1.
- The housing allowance exclusion applies to federal income taxes only. Ministers must include it when calculating self-employment tax (unless exempt).
- The fair rental value of a parsonage provided by the church is not taxable.
- The board should add next year’s allowance designation to its final meeting agenda of the current year. The action must be officially adopted and recorded in the minutes.
- The IRS also recognizes designations made in employment contracts or budget documents, as long as they are adopted in advance.
Estimating the Allowance
Most churches ask ministers to estimate their housing expenses for the upcoming year using a standardized form. For homeowners, this often includes:
- Down payment
- Mortgage payments
- Property taxes and insurance
- Utilities, furnishings, and appliances
- Repairs, improvements, and maintenance
- Miscellaneous housing-related costs
Tip:
Churches should consider designating more than the estimated amount to cover unforeseen costs or underestimations. Capping the allowance at the initial estimate could unfairly penalize ministers if actual expenses exceed projections.
Special Note for Ministers Without a Mortgage
When ministers pay off their mortgage, they often lose a large portion of their housing allowance exclusion. Some choose to:
- Take out a home equity loan, or
- Use a new mortgage on a debt-free home
They may count loan payments as housing expenses—but only if the loan is used for housing-related costs. The Tax Court has confirmed this.
Additional Reading
For more on housing allowances, see the following:
- Church & Clergy Tax Guide (chapter 6)
- Church Compensation: From Strategic Plan to Compliance (chapter 11)
- “Sample Housing Allowance for Pastors”
- “Payroll Rules for Housing Allowances: Can a Pastor Set Up a Housing Allowance on Two Payrolls?”
- “What if Our Minister Requests a Housing Allowance that Exceeds His Total Salary?”
- “Can an Interim Minister Receive a Housing Allowance?”
- “Is My Housing Allowance Considered “Earned” Income?”
- “Can a Retired Minister Receive a Housing Allowance?”
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