Q&A: Limits on Housing Allowance

Can our pastor buy a home—and live in the parsonage?

Our pastor lives in a church-owned parsonage. We designate a small part of his compensation each year as a parsonage allowance that he uses to pay the minimal expenses he incurs living in the parsonage. Last year he bought a home. He has asked our church board to designate a sizable portion of his salary as a housing allowance to pay for the expenses he incurs in owning this home. Can our church designate a housing allowance for him?
Several pastors who live in a church-provided parsonage have taken advantage of historically low housing prices to acquire a permanent home for use after they retire. But can pastors who live in a parsonage provided by their church take advantage of the housing allowance exclusion for expenses incurred in a home they have purchased for future use?
Unfortunately, the answer is no. The tax code specifies that “in the case of a minister of the gospel, gross income does not include—(1) the rental value of a home furnished to him as part of his compensation; or (2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, include furnishings and appurtenances such as a garage, plus the cost of utilities.”
In a ruling earlier this year, a federal appeals court concluded that a housing allowance is available only for a pastor’s actual residence. It noted that section 107 of the tax code, which contains the housing allowance exclusion, uses the singular term “home.” It also noted that the congressional committee reports describing the parsonage and housing allowance exclusions consistently use singular expressions. In further support for its conclusion, the court stressed that income exclusions should be “narrowly construed.”
The fact that a housing allowance cannot be used for expenses incurred in owning a “second” home does not mean that acquiring a home at a bargain price is not a good idea. Pastors in this situation should check with a tax professional to consider the options.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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