Our pastor owns two homes. One is the home in which he and his family resides. The second is a home in another state where he lived before accepting a call at our church a year ago. He has been unable to sell the former home, so he is renting it. He heard recently that a housing allowance can be applied to the expenses of more than one home. Is that correct? If so, can we increase our pastor’s 2011 housing allowance to cover the expenses of both homes?
Your pastor is referring to a recent decision by the United States Tax Court in which the Court ruled that a minister could apply a housing allowance to expenses incurred in owning two homes. One home was his primary residence, and the second home was a vacation home.
The IRS refused to let the minister apply his housing allowance to expenses of his second home. It reasoned that the tax code allows housing allowances to be applied to the expenses incurred in owning “a home,” and it concluded that the phrase “a home” means “one home.” The Court rejected this interpretation on the ground that it amounted to a rewriting of the tax code by attempting to insert a “one home” limitation that did not otherwise exist.
The Court concluded:
[The tax code] requires only that amounts paid as part of a minister’s compensation be used to rent or provide a home, i.e., a dwelling house of the minister, in order to be excluded from the minister’s gross income. In the present case, during each of the years at issue, the ministry paid the minister as part of his compensation [a housing allowance] which he used to provide for himself [two homes]. Those facts satisfy the requirements in [the tax code] for the exclusion from gross income of the portion of the housing allowance with respect to the minister’s second home.
This case suggests that in some cases a housing allowance may be applied to the housing-related expenses incurred by ministers in the ownership of two homes. But here are four important considerations to keep in mind:
First, the court did not directly address the question of whether a housing allowance can be applied to a second home that is used for commercial purposes (i.e., rented to another person or family). However, it stressed that the minister’s second home (in the case under consideration) was not used for commercial purposes, and so it can reasonably be assumed that the court considered this to be a requirement. This makes sense, since a second home that a minister rents to another person or family can hardly be considered the minister’s “home.”
Second, this case will not benefit ministers in the preparation of their 2010 tax returns since housing allowances cannot be designated or amended retroactively. It is true that many ministers request that their employing church designate a housing allowance that is greater than their estimated housing expenses for the new year in order to ensure that it exceeds their housing-related expenses, and these ministers may have a “surplus” allowance that can be used to partially offset expenses of a second home.
Third, churches should take this ruling into account when designating a minister’s housing allowance for 2011 and future years. Housing allowances can be amended prospectively, so churches that failed to take this ruling into account when designating a 2011 housing allowance for their minister may amend the allowance during the year. However, any amendment only operates prospectively.
Fourth, the IRS may “not acquiesce” in the Court’s ruling, meaning that it does not agree with the holding of the court and will not follow the decision in disposing of cases involving other taxpayers. And, it may decide to appeal the ruling to a federal appeals court where it may be overturned or modified. As a result, ministers should understand that reliance on this case could expose them to future audit risk. It is for this reason that ministers and churches should not rely on the case without first consulting with a tax professional.