Q: 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 housing allowance to cover the expenses of both homes?
Can a Housing Allowance Apply to Two Homes?
Your pastor is referring to a recent decision by the United States Tax Court. In this case, the Court ruled that a minister could apply a housing allowance to expenses incurred for two homes: a primary residence and a vacation home. The IRS had argued that the tax code allows a housing allowance to apply only to expenses for “a home,” interpreting the phrase as meaning “one home.” However, the Court rejected this interpretation, stating that the IRS’s reasoning added a “one home” limitation not present in the tax code.
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.
Important Considerations for Applying a Housing Allowance to Two Homes
While the Tax Court ruling suggests that a housing allowance may apply to the expenses for two homes, there are four critical factors to consider:
1. Commercial Use of the Second Home
The court did not address whether a housing allowance can be applied to a second home used for commercial purposes, such as being rented out. The court emphasized that in this case, the minister’s second home was not used for commercial purposes. Therefore, it is reasonable to assume that the second home must serve as the minister’s residence, not as a rental property.
2. Retroactive Designation Is Not Allowed
Housing allowances cannot be designated retroactively. This means ministers cannot apply a housing allowance to past expenses unless the allowance was designated in advance. Churches should ensure allowances are sufficient to cover anticipated expenses for the current year, including any potential expenses related to a second home.
3. Prospective Amendments to Housing Allowances
Churches can amend a housing allowance designation during the year, but only for expenses incurred prospectively. If the housing allowance for a minister did not initially account for the expenses of a second home, the church may revise the allowance for future expenses in the same calendar year.
4. Potential IRS Challenges
The IRS may “not acquiesce” to this Tax Court decision, meaning it may not agree with the ruling and could appeal it or disregard it in future cases involving other taxpayers. Ministers and churches relying on this case could face audit risk. It is crucial to consult a tax professional before relying on this precedent.
Best Practices for Housing Allowances Covering Two Homes
To avoid potential issues, churches and ministers should follow these best practices:
- Designate housing allowances in advance, ensuring they reflect all anticipated housing-related expenses.
- Avoid applying a housing allowance to a second home used for commercial purposes, such as a rental property.
- Consult with a tax professional to assess the risks and implications of applying a housing allowance to two homes.
- Monitor IRS guidance and legal developments regarding this Tax Court ruling.
FAQ: Housing Allowance on Two Homes
1. Can a housing allowance cover two homes?
Yes, under certain circumstances. The Tax Court has ruled that a housing allowance can apply to expenses for two homes, provided both serve as residences for the minister and are not used for commercial purposes.
2. Can the housing allowance for two homes be applied retroactively?
No, housing allowances must be designated in advance. Retroactive application of housing allowances is not allowed under IRS regulations.
3. What happens if the IRS disagrees with the Tax Court ruling?
The IRS may challenge this interpretation in future cases or audits. Ministers and churches relying on this precedent should seek advice from a qualified tax professional.
4. Should churches increase a housing allowance to cover two homes?
If appropriate, churches can amend housing allowances prospectively to cover expenses for two homes, provided the allowance complies with IRS rules and tax code requirements.
For further details, consult IRS.gov or seek advice from a tax professional experienced in housing allowance regulations.
